Question

On January 1, 2021, Pikes Corporation loaned Venti Company $320,000 and agreed to guarantee all of Venti’s long-term debt in exchange for (1) decision-making authority over all of Venti’s activities and (2) an annual management fee of 25 percent of Venti’s annual revenues. As a result of the agreement, Pikes becomes the primary beneficiary of Venti (now a variable interest entity). Pikes’ loan to Venti stipulated a 6 percent (market) rate of interest to be paid annually with principal due in 10 years.

On January 1, 2021, Pikes estimated that the fair value of Venti’s equity shares equaled $95,000 while Venti’s book value was $75,000. Any excess fair over book value at that date was attributed to Venti’s trademark with an indefinite life.

Because Pikes owns no equity in Venti, all of the acquisition-date excess fair over book value is allocated to the noncontrolling interest.

Venti paid Pikes 25 percent of its 2021 revenues at the end of the year and recorded the payment in other operating expenses. Venti also paid the interest to Pikes for the loan. On December 31, 2021, Pikes and Venti submitted the following statements for consolidation. (Parentheses indicate credit balances.)

Revenues	$	(812,000	)		$	(236,000	)
Management fee		(59,000	)
Cost of good sold		641,000				91,000
Other operating expenses		96,000				66,000
Interest income		(19,200	)			0
Interest expense		0				41,000
Net income		(153,200	)			(38,000	)
Retained earnings, 1/1		(1,384,000	)			(60,000	)
Net income		(153,200	)			(38,000	)
Dividends declared		79,000				0
Retained earnings, 12/31		(1,458,200	)			(98,000	)
Current assets		460,000				93,000
Loan receivable from Venti		320,000
Equipment (net)		765,000				547,000
Trademark		0				145,000
Total assets		1,545,000				785,000
Current liabilities		(36,800	)			(112,000	)
Loan payable to Pikes						(320,000	)
Other long-term debt		0				(240,000	)
Common stock		(50,000	)			(15,000	)
Retained earnings, 12/31		(1,458,200	)			(98,000	)
Total liabilities and equity	$	(1,545,000	)		$	(785,000	)

Prepare the December 31, 2021, consolidation worksheet for Pikes and its variable interest entity Venti. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Input all amounts as positive values.)

Answer 1

Even though Pikes Corporation is not having hold in equity ,but is having signficant Control over the decision making acitivies of Venti Company, as per the loan arrangment, it is assumed that, Pikes Corporation is the Holding Company and Venti Company is considered as Subsidiary.

Consolidation entries are as follows :-

NOTE :-1

Pikes Corporation received Management fee of $ 59,000 from Venti Company which 25% of revenue as part of the loan arrangement. So, it is eliminated from the income of Pikes corporation and other operting expense of Venti Company.

NOTE :-2

Pikes Corporation received interest income of $ 19,200 ($ 3,20,000*6%) from venti company as part of the loan arrangement. So, it is eliminiated form the interest income of Pikes corporation and eliminated from interest expense of Venti Company.

NOTE :-3

Pikes Corporation has given loan of $ 3,20,000 to Venti Company. So, it is eliminated frm Loan receivable of Pikes Corporation and Loan Payable of Venti Company.

Hence the statement of Income and statement of Financial position will be as follows individually for Pikes Corporation , Venti Company and Consolidation of Pikes Corporation.

P& L Statement
Particulars	Pikes Corporation	Venti Company	Consolidation
Revenues	8,12,000	2,36,000	10,48,000
Management fee *Note 1	59,000		0
Cost of good sold	6,41,000	91,000	7,32,000
Other operating expenses * Note 1	96,000	66,000	1,03,000
Interest income * Note 2	19,200	0	0
Interest expense * Note 2	0	41,000	21,800
Profit Before Tax	1,53,200	38,000	1,91,200

Statement of Financial Position
Particulars	Pikes Corporation	Venti Company	Consolidation
Current assets	4,60,000	93,000	5,53,000
Loan receivable from Venti * Note 3	3,20,000		0
Equipment (net)	7,65,000	5,47,000	13,12,000
Trademark	0	1,45,000	1,45,000
Total assets	15,45,000	7,85,000	20,10,000
Current liabilities	36,800	1,12,000	1,48,800
Loan payable to Pikes * Note 3		3,20,000	0
Other long-term debt	0	2,40,000	2,40,000
Common stock	50,000	15,000	65,000
Retained earnings, 12/31	14,58,200	98,000	1556200
Total liabilities and equity	15,45,000	7,85,000	20,10,000