Question

Consolidation worksheet for gain on constructive retirement of subsidiary’s debt with no AAP—Equity method
Assume that a Parent company acquires a 80% interest in its Subsidiary on January 1, 2015. On the date of acquisition, the fair value of the 80 percent controlling interest was $640,000 and the fair value of the 20 percent noncontrolling interest was $160,000. On January 1, 2015, the book value of net assets equaled $800,000 and the fair value of the identifiable net assets equaled the book value of identifiable net assets (i.e., there was no AAP or Goodwill).

On December 31, 2016, the Subsidiary company issued $800,000 (face) 8 percent, five-year bonds to an unaffiliated company for $832,000. The bonds pay interest annually on December 31, and the bond premium is amortized using the straight-line method. This results in annual bond-payable premium amortization equal to $6,400 per year.

On December 31, 2018, the Parent paid $776,000 to purchase all of the outstanding Subsidiary company bonds. The bond discount is amortized using the straight-line method, which results in annual bond-investment discount amortization equal to $8,000 per year.

The Parent and the Subsidiary report the following financial statements for the year ended December 31, 2019:

				Parent		Subsidiary								Parent		Subsidiary
Income statement									Balance sheet
Sales				$4,500,000		$800,000			Assets
Cost of goods sold				(2,800,000)		(500,000)			Cash					$700,000		$400,000
Gross profit				1,700,000		300,000			Accounts receivable					850,000		600,000
Operating & other expenses				(1,400,000)		(146,000)			Inventories					900,000		800,000
Bond interest income				72,000		-			PPE, net					2,000,000		1,500,000
Bond interest expense						(57,600)			Equity investment					778,560		-
Income from subsidiary				62,720		-			Investment in bond (net)					784,000		-
Net income				$434,720		$96,400								$6,012,560		$3,300,000
Statement of retained earnings									Liabilities and stockholders' equity
BOY retained earnings				$1,577,840		$240,800			Accounts payable					$700,000		$450,000
Net income				434,720		96,400			Other current liabilities					900,000		650,000
Dividends				(200,000)		(40,000)			Bond payable (net)					-		812,800
Ending retained earnings				$1,812,560		$297,200			Other long-term liabilities					1,000,000		450,000
									Common stock					600,000		140,000
									APIC					1,000,000		500,000
									Retained earnings					1,812,560		297,200
														6,012,560		3,300,000

The parent uses the equity method of pre-consolidation investment bookkeeping. Provide the consolidation entries and prepare a consolidation worksheet for the year ended December 31, 2019.

Round answers to the nearest whole number.

Credit Debit 62,720 19,280 40,000 30,720 11,280 Consolidation Journal Description Cquity income Income attributable to NCI Dividends Subsidiary Investment in Subsidiary Noncontrolling Interest Common Stock (Subsidiary) APIC (Subsidiary BOY Retained earnings Subsidiary Investment in Subsidiary Noncontrolling interest [lbond] Bond payable (net) Interest income Investment in bonds, net ✓ Interest expense Investment in Subsidiary 140,000 500,000 240,000 0 704,640 176,160 812,800 72.000 784,000 57,600 43,200 Use negative signs with your answers in the Consolidated column for: Cost of goods sold, all expenses (inc. Total expenses), Income attributable to NCI and Dividends.

Answer 1

Solution:

Entry [c Working Noter page non ] Net Income of subsidiary Income Attributable to NCI[896,400A - 2017 Less Dividend Share [$40,000 4-201.] 1996,400| $19,280 (3 800) $11,280 Non controlling Interest 362,720 Investment in subsidary P Equit Income Les Share in Dividend income [840,000 A-801] (332,000) Investmone is subsidary $30,720 [ Bond] Bond payable $812,800 $72,000 $786,00 Interest income Les Investment in Bond Less Investment Expense ($54.600) Investment is subsidary $43,200

Prepare journal entries as follows:

Credit [C] Debit $62,720 $19.280 Description Equity Income Net Income Attributable to NCI Dividends-subsidiary Investments in subsidiary Noncontrolling Interest (To record remove equity income and assign income to Noncontrolling interest) $40.000 $30.720 $11,280 [E] $140,000 $500,000 $240,800 Common stock (subsidiary) APIC (subsidiary) BOY Retained Earnings-Subsidiary Investment in subsidiary [$140,000+ $500,000 + $240.800] > 80% Noncontrolling Interest ($140,000+ $500,000 + $240.800] > 20% (To record remove of equity stockholding of subsidiary) $704,640 $176,160 $812.800 $72.000 [Bond] Bond payable (net) Interest Income Investment in bonds Interest expense Investment in subsidiary (To record remove of intercompany bonds transfer) $784,000 $57,600 $43,200

________________________________________________________________________________

Consolidation Worksheet Subsidiary Parent Debit Credit Consolidated $4,500,000 -2.800.000 1,700,000 -1,400,000 72,000 $800,000 -500,000 300,000 -146,000 [lbond] 72,000 -57,600 -203,600 -57,600 [lbond] $5,300,000 ($3,300,000) $2,000,000 ($1,546,000)| $0 sol ($1,546,000) $0 $453,4801 ($19,280) $434,200 Income Statement Sales Cost of goods sold Gross profit Operating expenses & other expenses Bond interest income Bond interest expense Total expenses Equity Income from Subsidiary Consolidated Net Income Income attributable to NCI Income attributable to Control Int Retained Earnings Statement Beg. Ret. Earnings Income attributable to Control Int Dividends Declared Ending Retained Earnings Balance Sheet -1,328,000 62,720 434,200 [C] 62,720 96,400 [C] $19.280 $434,720 $96,400 [E] $240,800 $1,577,8401 434,720 -200.000 $1,812,560 $240.800 96,400 -40,000 $297,200 $1,577,8401 434,720 -200.000 $1,812,560 $40,000 [C]

Cash Accounts receivable Inventories Property, Plant & Equipment, net Investment in Subsidiary $700,000 850,000 900,000 2,000,000 778,560 $400,000 600,000 800,000 1,500,000 $1,100,000 $1,450,000 $1,700,000 $3,500,000 $30,720 $704,640 $176,160 $784,000 [C] [E] [lbond] [lbond] Investment in Bond (net) Total Assets 784,000 $6,012,560 $3,300,000 $7,750,000 $700,000 900,000 $1,150,000 $1,550,000 [lbond] $812,800 Accounts Payable Other current liabilities Bond Payable (net) Other Long-term liabilities Common Stock APIC Retained Earnings 100.000 600,000 1,000,000 1,812,560 $450,000 650,000 812,800 450,000 140,000 500,000 297,200 [E] [E] $140,000 $500,000 $550,000 $600.000 1,000,000 1,812,560

Noncontrolling Interest $11,280 $176,160 C E $11,2801 $176,160 Total Liabilities and Equity $6,012,5601 $3,300,000