Question

On January 1, 2017, Mona, Inc., acquired 80 percent of Lisa Company’s common stock as well as 60 percent of its preferred shares. Mona paid $74,000 in cash for the preferred stock, with a call value of 110 percent of the $50 per share par value. The remaining 40 percent of the preferred shares traded at a $43,000 fair value. Mona paid $580,000 for the common stock. At the acquisition date, the noncontrolling interest in the common stock had a fair value of $145,000. The excess fair value over Lisa’s book value was attributed to franchise contracts of $86,000. This intangible asset is being amortized over a 20-year period. Lisa pays all preferred stock dividends (a total of $17,000 per year) on an annual basis. During 2017, Lisa’s book value increased by $80,000.

On January 2, 2017, Mona acquired one-half of Lisa's outstanding bonds payable to reduce the business combination's debt position. Lisa's bonds had a face value of $100,000 and paid cash interest of 7 percent per year. These bonds had been issued to the public to yield 16 percent. Interest is paid each December 31. On January 2, 2017, these bonds had a total $74,816 carrying amount. Mona paid $51,733, indicating an effective interest rate of 6 percent.

On January 3, 2017, Mona sold Lisa fixed assets that had originally cost $109,000 but had accumulated depreciation of $70,000 when transferred. The transfer was made at a price of $138,000. These assets were estimated to have a remaining useful life of 12 years.

The individual financial statements for these two companies for the year ending December 31, 2018, are as follows:

                                           Mona, Inc.                 Lisa Company

Sales and other revenues $ (518,000 )              $ (218,000 )

Expenses                                   229,000                  129,000

Dividend income—Lisa common stock         (15,200 )                     0

Dividend income—Lisa preferred stock        (10,200 )                     0

Net income                                                 $ (314,400 )           $ (89,000 )

Retained earnings, 1/1/18                           $ (709,000 )          $ (518,000 )

Net income (above)                                       (314,400 )               (89,000 )

Dividends declared—common stock               101,800                  19,000

Dividends declared—preferred stock                    0                       17,000

Retained earnings, 12/31/18                        $ (921,600 )            $ (571,000 )

Current assets                                               $ 139,419                 $ 509,000

Investment in Lisa—common stock                 580,000                       0

Investment in Lisa—preferred stock                  74,000                       0

Investment in Lisa—bonds                                50,917                         0

Fixed assets                                                  1,109,000                  809,000

Accumulated depreciation                              (309,000 )                (209,000 )

Total assets                                                 $ 1,644,336                  $ 1,109,000

Accounts payable                                        $ (413,736 )                 $ (134,442 )

Bonds payable                                                     0                            (100,000 )

Discount on bonds payable                                  0                               14,442

Common stock                                                  (309,000 )                   (209,000 )

Preferred stock                                                      0                             (109,000 )

Retained earnings, 12/31/18                            (921,600 )                     (571,000 )

Total liabilities and equities                            $ (1,644,336 )               $ (1,109,000 )

1. What consolidation worksheet adjustments would have been required as of January 1, 2017, to eliminate the subsidiary's common and preferred stocks?

2. What consolidation worksheet adjustments would have been required as of December 31, 2017, to account for Mona's purchase of Lisa's bonds?

3. What consolidation worksheet adjustments would have been required as of December 31, 2017, to account for the intra-entity sale of fixed assets?

4. Assume that consolidated financial statements are being prepared for the year ending December 31, 2018. Calculate the consolidated balance for each of the following accounts: Franchises, Fixed Assets, Accumulated Depreciation, Expenses

Answer 1

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you. Mona Lisa Monalisa Parta Consideration transferred for common stock Consideration transferred for preferred stock Noncontrolling interest in common stock Noncontrolling interest in preferred stock Lisa' sacquisition-date fair value Book value of Lisa Excess assigned to franchises 580,000 74,000 145,000 43,000 842,000 756,000 86,000 CONSOLIDATION ENTRIES 1/1/17 Preferred Stock (Lisa) Common Stock (Lisa) Retained Earnings, 1/1/17 (Lisa) Franchises Investment in Lisa-Common Stock Investment in Lisa-Preferred Stock Noncontrolling Interest in Lisa, Inc 109,000 209,000 438,000 86,000 $ $ $ 580,000 74,000 188,000 Part b $83,210/2 Acquisition price of bonds, 1/2/17 Carrying amount of (Half bonds payable acquired) Loss on extinguishment of debt Interest income-Mona ($51,733x6%) Interest expense-Lisa ($37,408 x 16%) $ $ $ 51,733 (37,408) 14,325 3,104 5,985 (rounded) (rounded) $ $ 51,733 Carrying amount-date of acquisition, 1/2/17 Cash interest ($50,000 x 7%) Effective interest (above) Investment in Bonds of Lisa 3,500 3,104 $ $ 396 51,337 $ 37,408 Bonds payable (carrying amount) Carrying amount-date of acquisition, 1/2/17 Cash interest ($50,000 x 7%) Effective interest (above) Bonds payable (carrying amount as of 12/31/17) 3,500 5,985 $ $ 2,485 39,893 CONSOLIDATION ENTRY B-December 31, 2017 50,000 3,104 14,325 Bonds Payable Interest Income (or other revenues) Loss on Retirement of Bonds Discount on Bonds Payable ($50,000 - $47,513) Interest Expense Investment in Bonds of Lisa $ $ $ 10,107 5,985 51,337

Part Cost of fixed assets Depreciation expense Accumulated depreciation ($109,000-$70,000)/12 $70,000+$3,250 109,000 3,250 73,250 December 31, 2017 book values based on transfer price: $138,000/12 Cost of fixed assets Depreciation expense (10-year life) Accumulated depreciation Gain on transfer of fixed assets 138,000 11,500 11,500 99,000 $138,000-$39,000 Book value CONSOLIDATION ENTRY TA-December 31, 2017 99,000 Gain on Transfer of Fixed Assets (to remove) Accumulated Depreciation ($73,250 - $11,500) Depreciation Expense ($11,500 - $3,250) Fixed Assets ($138,000 - $109,000) $ $ $ 61,750 8,250 29,000 Part d Original allocation to franchises (given) Amortization ($86,000/20 Years*2) Consolidated franchises-12/31/18 86,000 (8,600) 77,400 Fixed assets (book values): Mona, Inc. Lisa Co. Reduction necessitated by intra-entity sale 1,109,000 809,000 (29,000) Consolidated fixed assets-12/31/18 1,889,000 Accumulated depreciation (book values): Mona, Inc Lisa Co. Increase needed to eliminate intra-entity sale 309,000 209,000 55,250 Consolidated Acc.Depr.- 12/31/18 573,250 229,000 129,000 4,300 Expenses (book values): Mona, Inc Lisa Co. Recognition of amortization on franchises Elimination of interest expense on intercom- pany debt ($39,893 (see part b] x 16%) Elimination of excess depreciation from intra-entity transfer of fixed assets $11,500-$3,250 Consolidated expenses (6,383) (8,250) 347,667