Question

Assume that a Parent company acquires a 75% interest in its Subsidiary on January 1, 2016. On the date of acquisition, the fair value of the 75% controlling interest was $1,800,000 and the fair value of the 25% noncontrolling interest was $600,000. 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 parent uses the equity method to account for its investment in the subsidiary.

On December 31, 2017, the Subsidiary company issued $1,500,000 (face) 6 percent, five-year bonds to an unaffiliated company for $1,380,218 (i.e. the bonds had an effective yield of 8 percent). The bonds pay interest annually on December 31, and the bond discount is amortized using the straight-line method. This results in annual bond-payable discount amortization equal to $23,956 per year.

On December 31, 2019, the Parent paid $1,540,849 to purchase all of the outstanding Subsidiary company bonds (i.e. the bonds had an effective yield of 5 percent). The bond premium is amortized using the straight-line method, which results in annual bond-investment premium amortization equal to $13,616 per year.

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

Income Statement
	Parent	Subsidiary
Sales	$12,100,000	$1,240,000
Cost of goods sold	(9,060,000)	(710,000)
Gross Profit	3,040,000	530,000
Income (loss) from subsidiary	131,355
Bond interest income	76,384
Bond interest expense		(113,956)
Operating expenses	(2,030,000)	(291,000)
Net income	$ 1,217,739	$   125,044

Statement of Retained Earnings
	Parent	Subsidiary
BOY Retained Earnings	$8,036,000	$1,115,000
Net income	1,217,739	125,044
Dividends	(170,000)	(26,000)
EOY Retained Earnings	$9,083,739	$1,214,044

Balance Sheet
	Parent	Subsidiary
Assets:
Cash	$ 1,559,000	$ 596,131
Accounts receivable	3,100,000	760,000
Inventory	3,105,000	520,000
Equity Investment	2,027,887
Investment in bonds	1,527,233
PPE, net	9,700,000	4,450,000
	$21,019,120	$6,326,131
Liabilities and Stockholders’ Equity:
Accounts payable	$ 1,650,000	$   620,000
Current Liabilities	1,700,000	700,000
Bonds payable		1,452,087
Long-term Liabilities	2,080,000	750,000
Common Stock	1,020,000	540,000
APIC	5,485,381	1,050,000
Retained Earnings	9,083,739	1,214,044
	$21,019,120	$6,326,131

Required:

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

Answer 1

Date	Particulars	Amount ($)	Amount ($)
	Net assets	1800000
	Bank		1800000
	(Being 75% controlling interest acquired)
	Bank	1035164
	Discount on issue of bond	89836.5
	6% Bond		1125000
	(Being 6% bond issued)
	Profit and loss account	17967.3
	Discount on issue of bond		17967.3
	(Being discount on bond written off against profit and loss account)
	Work sheet
	Net income	1217739
	Add: Share of subsidiary profit	93783
			1311522
	Statement of retained earnings
	BOY retained earnings	8872250
	Add: Profit	1311522
		10183772
	Less: Dividend	196000
			9987772
	EOY retained earnings		9994272
			19982044
	Balance sheet
		Own	Share in subsidiary	Total
	Cash	1559000	447098.3	2006098
	Accounts receivable	3100000	570000	3670000
	Inventory	3105000	390000	3495000
	Investment in bonds	1527233		1527233
	PPE net	9700000	3337500	13037500
	Liabilities and shareholders' equity
	Accounts payable	1650000	465000	2115000
	Current liabilities	1700000	525000	2225000
	Bonds payable		1089065	1089065
	Long term liabilities	2080000	562500	2642500
	Common stock	1020000		1020000
	APIC	5485381		5485381
	Retained earnings			19982044