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Computing Carrying Value, Interest Revenue and Expense, Controlling and Noncontrolling Income On January 2, 2014, Peoples,...

Computing Carrying Value, Interest Revenue and Expense, Controlling and Noncontrolling Income
On January 2, 2014, Peoples, Inc. acquired an 80% interest in Schmidt Corporation for $900,000. Schmidt reported total stockholders’ equity of $1,000,000 on this date. An examination of Schmidt’s books revealed that book value was equal to fair value for all assets and liabilities except for inventory, which was undervalued by $60,000. All of the undervalued inventory was sold during 2014.
Peoples also purchased 30% of the $500,000 par value outstanding bonds of Schmidt Corporation for $140,000 on January 2, 2014. The bonds mature in 10 years, carry an 11% annual interest rate payable on June 30 and December 31, and had a carrying value of $505,000 on the date of purchase. Both companies use the straight- line method to amortize bond discounts and premiums.
Peoples reported net income of $300,000 for 2014 and paid dividends of $130,000 during 2014. Schmidt Corporation reported net income of $320,000 for 2011 and paid dividends of $90,000 during the year.
Required:
Compute the following items at December 31, 2014:
1. Carrying value of the debt.
2. Interest revenue reported by Peoples, Inc.
3. Interest expense reported by Schmidt Corporation
4. Balance in the Investment in Schmidt Bonds account.
5. Controlling interest in consolidated net income for 2014 using the t-account approach.
6. Noncontrolling interest in consolidated income for 2014

Solutions

Expert Solution

1.         Carrying value of debt - 1/2/2014                                                                 $505,000

  Less: Premium amortization - (($5,000/20) × 2 periods)    500

            Carrying value of debt - 12/31/2014                                                             $504,500

2.         Stated interest (30% of $500,000 × .11)                                                        $16,500

  Add: Discount amortization (($10,000/20) × 2 periods)    1,000

            Interest revenue                                                                                               $17,500

3.         Stated interest ($500,000 × .11)                                                                      $55,000

  Less: Premium amortization ($5,000/20) (2) 500

            Interest expense                                                                                               $54,500

4.         Cost of bond investment (1/2/2014)                                                             $140,000

            Add: Discount amortization *    1,000

  Investment account balance - 12/31/2014 $141,000

            * $500,000 par × 30% less $140,000 paid divided by 10 years = $1,000

5.         Reported net income - Peoples                                                                      $300,000

            Less: Dividend income ($90,000 × .80) 72,000

            Independent net income    228,000

  Add: Constructive gain on bond retirement    10,000

   Less: Constructive gain recorded during year (1,000)

            Contribution of Peoples to consolidated income                                           237,000

             Reported net income - Schmidt                                        $320,000

             Less: amortization of difference between implied and book value - COGS (60,000)

             Add: Constructive gain on bond retirement

            ($505,000 - $500,000) × .30 =   1,500

            Less: Constructive gain recorded during year                           (150)

            Income after adjustment for constructive gain                   261,350

× .80

            Parent's share of adjusted income   209,080

            Controlling interest in consolidated net income                                            $446,080

  Computation and Allocation of Difference between Implied and Book Value Acquired

6.         Non controlling interest in consolidated income $261,350 × .20 = $52,270

ekkarill92 answered 2 years ago
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