Question

Highlight, Inc., owns all outstanding stock of Kiort Corporation. The two companies report the following balances for the year ending December 31, 2017:

 

	Highlight				Kiort
Revenues and interest income	$	(670,000	)		$	(390,000	)
Operating and interest expense		540,000				221,000
Other gains and losses		(120,000	)			(32,000	)
Net income	$	(250,000	)		$	(201,000	)

Note: Parentheses indicate a credit balance.

 

On January 1, 2017, Highlight acquired on the open market bonds for $108,000 originally issued by Kiort. This investment had an effective rate of 8 percent. The bonds had a face value of $100,000 and a cash interest rate of 9 percent. At the date of acquisition, these bonds were shown as liabilities by Kiort with a book value of $84,000 (based on an effective rate of 11 percent).

 

Determine the balances that should appear on a consolidated income statement for 2017.

 

Answer 1

§ Interest Expense To Be Eliminated = $84,000 × 11% = $9,240

§ Interest Income To Be Eliminated = $108,000 × 8% = $8,640

§ Loss To Be Recognized = $108,000 – $84,000 = $24,000

CONSOLIDATED TOTALS

§ Revenues and Interest Income = $1,051,360 (add the two book values and eliminate interest income on intra-entity bond)

§ Operating and Interest Expense = $751,760 (add the two book values and eliminate interest expense on intra-entity bond)

§ Other Gains and Losses = $152,000 (add the two book values)

§ Loss on Retirement of Debt = $24,000 (computed above)

§ Net Income = $427,600 (consolidated revenues, interest income, and gains less consolidated operating and interest expense and losses)