Question

Assume that Johnson Company acquires a 75% interest in its The Nephew 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). Johnson uses the equity method to account for its investment in the subsidiary.

On December 31, 2017, the The Nephew 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, Johnson paid $1,540,849 to purchase all of the outstanding The Nephew 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 financial statements on the next sheet for the year ended December 31, 2020.

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

Johnson & His Nephew							Consolidated
			Consolidation Entries				Statements
	Johnson	His Nephew		Dr		Cr	Johnson & His Nephew
Income Statement
Sales	12,100,000	1,240,000					13,340,000
Cost of Goods Sold	(9,060,000)	(710,000)					(9,770,000)
Gross Profit	3,040,000	530,000					3,570,000
Income (loss) from Subsidiary	131,355	-					131,355
Operating & other expenses	(2,030,000)	(291,000)					(2,321,000)
Bond interest income	76,384						76,384
Bond interest expense		(113,956)					(113,956)
Consolidated Net Income	1,217,739	125,044					1,342,783
Income attributable to NCI							0
Income attributable to Controlling Int							1,342,783
Retained Earnings Statement
Beginning Retained Earnings	8,036,000	1,115,000					9,151,000
Net Income	1,217,739	125,044					1,342,783
Dividends Declared	(170,000)	(26,000)					(196,000)
Ending Retained Earnings	9,083,739	1,214,044					10,297,783
Balance Sheet
Cash	1,559,000	596,131					2,155,131
Accounts receivable	3,100,000	760,000					3,860,000
Inventories	3,105,000	520,000					3,625,000
Property, Plant & Equipment, net	9,700,000	4,450,000					14,150,000
Equity Investment	2,027,887						2,027,887
Investment in Bond (net)	1,527,233						1,527,233
Total Assets	21,019,120	6,326,131					27,345,251
Accounts Payable	1,650,000	620,000					2,270,000
Other current liabilities	1,700,000	700,000					2,400,000
Bond Payable (net)		1,452,087					1,452,087
Other long-term liabilites	2,080,000	750,000					2,830,000
Common Stock	1,020,000	540,000					1,560,000
APIC	5,485,381	1,050,000					6,535,381
Retained Earnings	9,083,739	1,214,044					10,297,783
Noncontrolling Interest							0
Total Liabilities and Equity	21,019,120	6,326,131		0		0	27,345,251

Answer 1

	Journal entries
Date	Particulars	Debit ($)	Credit ($)
	Cash	596131
	Accounts receivable	760000
	Inventories	520000
	Property, plant and equipment	4450000
	Accounts payable	6326131	620000
	Other current liabilities		700000
	Bond payable		1452087
	Other long term liabilities		750000
	Purchase consideration		2027887
	Capital reserve		776157
	(Being the assets and liabilities value of the subsidiary adjusted)
	Purchase consideration	2027887
	Common stock		500000
	APIC		1527887
	(Being purchase consideration discharged)

	Consolidation worksheet:
	Johnson	His Nephew	Consolidation entries			Consolidated statement
			Debit	Credit
Income statement
Sales	12100000	1240000				13340000
Cost of goods sold	-9060000	-710000				-9770000
Gross profit	3040000	530000				3570000
Income / (Loss) from subsidiaries	131355					131355
Operating and other expenses	-2030000	-291000				-2321000
Bond interest income	76384					76384
Bond interest expense		-113956				-113956
Consolidated net income	1217739	125044				1342783
Income attributable to NCI
Income attributable to controlling interest
Retained earnings statement
Beginning retained earnings	8036000	1115000				9151000
Net income	1217739	125044				1342783
Dividend declared	-170000	-26000				-196000
Ending retained earnings	9083739	1214044				10297783
Balance sheet
Cash	1559000	596131				2155131
Accounts receivable	3100000	760000				3860000
Inventories	3105000	520000				3625000
Property, plant and equipment	9700000	4450000				14150000
Equity investment						0
Investment in bond	1527233					1527233
Total asset	18991233	6326131				25317364
Accounts payable	1650000	620000				2270000
Other current liabilities	1700000	700000				2400000
Bond payable		1452087				1452087
Other long term liabilities	2080000	750000				2830000
Common stock	1020000			500000		1520000
APIC	5485381			1527887		7013268
Retained earnings	9859896			776157		10636053
	21795277	3522087				25317364