Question

Assume that a Parent company acquires a 90% interest in its Subsidiary on January 1, 2016. On the date of acquisition, the fair value of the 90% controlling interest was $2,160,000 and the fair value of the 10% noncontrolling interest was $240,000. On January 1, 2016, the book value of net assets equaled $2,400,000 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). The subsidiary’s retained earnings balance was $452,000 on the date of acquisition. The parent uses the cost method to account for its investment in the subsidiary.

On December 31, 2017, the Subsidiary company issued $2,000,000 (face) 7 percent, five-year bonds to an unaffiliated company for $2,173,179 (i.e. the bonds had an effective yield of 5 percent). 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 $34,636 per year.

On December 31, 2019, the Parent paid $1,948,458 to purchase all of the outstanding Subsidiary company bonds (i.e. the bonds had an effective yield of 8 percent). The bond discount is amortized using the straight-line method, which results in annual bond-investment discount amortization equal to $17,181 per year.

The Parent and the Subsidiary report the following financial statements for the year ended December 31, 2020:

Income Statement
	Parent	Subsidiary
Sales	$12,500,000	$1,700,000
Cost of goods sold	(9,200,000)	(990,000)
Gross Profit	3,300,000	710,000
Income (loss) from subsidiary	27,000
Bond interest income	157,181
Bond interest expense		(105,364)
Operating expenses	(2,500,000)	(410,000)
Net income	$    984,181	$ 194,636

Statement of Retained Earnings
	Parent	Subsidiary
BOY Retained Earnings	$7,360,351	$   990,000
Net income	984,181	194,636
Dividends	(200,000)	(30,000)
EOY Retained Earnings	$8,144,532	$1,154,636

Balance Sheet
	Parent	Subsidiary
Assets:
Cash	$   1,750,000	$1,020,000
Accounts receivable	2,300,000	1,150,000
Inventory	2,400,000	1,500,907
Investment in subsidiary	2,160,000
Investment in bonds	1,965,639
PPE, net	14,025,000	4,389,000
	$24,600,639	$8,059,907
Liabilities and Stockholders’ Equity:
Accounts payable	$ 1,600,000	$   838,000
Current Liabilities	2,200,000	1,100,000
Bonds payable		2,069,271
Long-term Liabilities	2,226,100	950,000
Common Stock	1,162,000	398,000
APIC	9,268,007	1,550,000
Retained Earnings	8,144,532	1,154,636
	$24,600,639	$8,059,907

Required:

Provide the consolidation entries and prepare a consolidation worksheet for the year ended December 31, 2018.

Answer 1

Consolidation entries:

There will be two entries in this case, one entry to remove the parent's investment in sub and the other to elimiate the bonds.

1. Entry to eliminate Investment in Subsidiary, parents' portion of Equity in sub

1. Entry to eliminate Investment in Subsidiary, parents' portion of Equity in sub
Common Stock Dr	398,000		Remove Sub's Sharecapital
APIC Dr	1,550,000		Remove Sub's APIC
Retained Earnings Dr	452,000		Remove Sub's RE on the date if acquisition
Retained Earnings Dr	54,719		Remove NCI share of post acquisition earnings
Retained Earnings Dr	3,000		Remove NCI share of dividends paid
NCI		297,719
To Investment in Subsidiary		2,160,000	Remove Parent's investment in sub
	2,457,719	2,457,719

2. Entry to elimiate Bond payable and bond receivable, Interest income and Interest expense

The whole amount on bonds payable and Investment in bonds are to be eliminate, Interest income and interest expense. The balancing figure is adjusted to RE in the proportion of ownership to Parent and NCI

Bonds Payable Dr	2,069,271.00
To Investment in Bonds		1,965,639.00
Interest Income	157,180.67
To Interest Expense		105,364.20
Retained Earnings - Parent @90%		139,903.62
Retained Earnings - NCI @10%		15,544.85

Note: when bonds payable, investment in bonds, interest income and interest expenses are reversed in the above entry, the balancing figure is 155,448.47, 90% of this attributable to Parent

Consolidation Worksheet as of December 31, 2020:

	Parent	Subsidiary	Consolidation entries		Non controlling Interest	Consolidated Totals
			Debit	credit
Cash	1,750,000	1,020,000				2,770,000
Accounts receivable	2,300,000	1,150,000				3,450,000
Inventory	2,400,000	1,500,907				3,900,907
Investment in subsidiary	2,160,000			2,160,000		-
Investment in bonds	1,965,639			1,965,639		-
PPE, net	14,025,000	4,389,000				18,414,000
	24,600,639	8,059,907	-	4,125,639	-	28,534,907
Liabilities and Stockholders’ Equity:
Accounts payable	1,600,000	838,000				2,438,000
Current Liabilities	2200000	1100000				3,300,000
Bonds payable		2069271	2069271			0
Long-term Liabilities	2226100	950000				3,176,100
Common Stock	1162000	398000	398000			1,162,000
APIC	9268007	1550000	1550000			9,268,007
Retained Earnings	8,144,532	1,154,636	609,180.67	245,267.82	54,718.75	8,880,536.40
NCI					310,263.60	310,263.60
	24,600,639	8,059,907				28,534,907

Workings:

a. Debit adjustment to RE:

RE on the date of acquistion - 452,000.00

Add: Interest income eliminated 157,180.67

Total Adjustement 609,180.67

b. Credit adjustment to RE:

Interest expense eliminated 105,364.20

+RE adjustment parent;s share 139,903.62

Total adjustment 245,267.82

c. NCI:

Post acquistion share of RE 54,718.75

d. NCI  

Fair value on date of acquisiton 240,000

+Post acquisition share of RE 54,178.75

+ RE Adjustment on bonds 15,544.85

Total NCI 310,263.60

Post acquistion RE:

Retained earnings as of Dec 31, 2020		1,154,636.00
RE on the date if acquisition		452,000.00
Post Acquistion RE		702,636.00
LESS: Elimination		155,448.47
Adjuted RE		547,187.53
NCI		54,718.75