Question

Consolidated amounts when affiliate's debt is acquired from non-affiliate

Assume that a Parent company owns 100 percent of its Subsidiary. On December 31, 2013, the Parent company had a $400,000 (face) bond payable outstanding with a carrying value of $420,000. The bond was originally issued to an unaffiliated company. On that same date, the Subsidiary acquired the bond for $398,000. During 2013, the Parent company reported $180,000 of (pre-consolidation) income from its own operations (i.e., prior to any equity method adjustments by the Parent company) and after recording interest expense. The Subsidiary reported $100,000 of (pre-consolidation) income from its own operations. Related to the bond during 2013, the parent reported interest expense of $55,000. The unaffiliated company that held the bond prior to December 31, 2013 recorded interest income of $55,000. Determine the following amounts that will appear in the 2013 consolidated income statement:

a. Interest income from bond investment

b. Interest expense on bond payable

c. Gain (loss) on constructive retirement of bond payable Use a negative sign with answer to indicate a loss.

d. Consolidated net income

Answer 1

Answer

Consolidated income statement:

A.

Interest income from bond investment:

in make a consolidated statement the interest income from bond investment ends ,hence subsidiary company didn't recorded any income related investment.so, there is no need to adjust the interest iincome in consolidated income.

B.

Interest expense on bond payable:

interest expense of $55,000 to be payable to unaffiliated.

So Interest expense $55000 is to be record in consolidated income statement.

C.

Gain (loss) on constructive retirement of bond payable:

bond payable outstanding with a carrying value of    $420,000

Price paid by Subsidiary company for purchase $398000

Gain on constructive retirement of bond payable:              $22000

D.

Consolidated net income:

       Income for parent company            = 180000

Add:income for subsidiary company         = 100000

Gain on constructive retirement of bond payable    = 22000

Consolidated net income:                                                   = 302000