Question

Assume that a parent company owns 75 percent of its subsidiary. On January 1, 2016, the parent company had a $100,000 (face value) 8 percent bond payable outstanding with a carrying value of $94,000. Several years ago, the bond was originally issued to an unaffiliated company for 92% of par value. On January 1, 2016, the subsidiary acquired the bond for $91,000. During 2016, the parent company reported $400,000 of (pre-consolidation) income from its own operations (prior to any equity method adjustments by the parent company) and after recording interest expense. The subsidiary reported $120,000 of (pre-consolidation) income from its operation after recording interest income. Related to the bond during 2016, the parent reported interest expense of $8,000 while the subsidiary reported interest income of $9,000. Determine the following amounts that will appear in the 2016 consolidated oncome statement:

1. Gain or loss on constructive retirement of bond payable
2. Controlling interest share of income from consolidated net income (after noncontrolling interest share of income in subsidiary)

Answer 1

1. Gain or loss on constructive retirement of Bond payable.

Purchase price of Bond is 92% of Face value .

Hence purchase price of Bond = $100000 x 92%=$92000

Carrying value of Bond is $94000

Bond acquired by Subsidiary $91000

Hence Gain on Bond Payable= (Carrying value -Purchase price of bonds acquired )=$94000-$91000=$3000.

2.Controlling interest share of income from consolidated net income (after non controlling interest share of income in subsidiary)

Here Parent company holds 72% of subsidiary hence non controlling share is 25%

Income of subsidiary is $120000 Hence Non controlling or minority interest is =$120000 x 25% =$30000.

Controlling interest share of income from consolidated net income =$120000-$30000=$90000.