Question

Willy Wagtail Company has $4,000,000 of 12% bonds outstanding on December 31, 2004 with unamortized premium of $120,000. These bonds pay interest semiannually on January 1 and July 1 and mature on January 1, 2010. Straight-line amortization is used. Garden Inc., 80%-owned subsidiary of Willy Wagtail, buys $1,000,000 par value of Willy Wagtail’s outstanding bonds in the market for $980,000. There is only one issue of outstanding bonds of the affiliated companies and they have consolidated financial statements. For the year 2005, Willy Wagtail has income from its separate operations (excluding investment income) of $4,500,000 and Garden reports net income of $600,000.

Required: Determine the following:
1.	Noncontrolling interest expense for 2005.
2.	Consolidated net income for Willy Wagtail Company and subsidiary for 2005.

Answer 1

1. Non-controlling interest expense means the expenses of the subsidiary company.

So we have to calculate the expenses incurred by the subsidiary company only.

Here, the subsidiary company is Garden Inc.

Garden Co. purchased the bond from the Willy Wagtail Co. So Garden Co. must amortize the bond.

Amortisation per year = (1000000 - 30000) / 5

= 194000

Here, 1000000 is the par value of the purchased bond

30000 (120000 * 1000000 / 4000000) is the premium which will get back after the maturity of bond. So, it must be reduced from par value.

5 is the years remaining for the maturity of bond. So, divided by 5 gets the per year ammortisation.

This is the only expense incurred by the Garden Co.

So, Non controlling interest expense is 194000.

2. Consolidated net income means the net income of both the companies (parent co. and subsidiary co.) are added.

Net income of Garden Co. is given in the question as $600000.

We have to calculate net income of Willy Wagtail Co. also.

Its income from separate operations are $4500000.

It had $4000000 12% bond last year and Co. sold $1000000 from this. So now Co. have $3000000 bonds only.

He will get 12% interest from this bond. But he gets interest semiannually on 1 july and 1 january.

In 1 january he will get the interest on the basis of half of the previous year bonds.

In 1 july he will get the interest on the basis of half of the current year bonds.

So interest is,

On 1 January = (4000000 / 2) * 12%

= 240000

On 1 July = (3000000 / 2) * 12%

= 180000

Total interest received = 420000

We have to calculate the ammortisation expense as well.

Ammortisation for the year = (3000000 - 90000) / 5

= 582000

Here, 3000000 is the par value of the bond.

90000 (120000 * 3000000 / 4000000) is the premium that will get back after the maturity of the bond. So, this should reduced from the par value.

5 is the years remaining for the maturity of bond. Divinding by 5 gets the per year ammortisation.

Willy Co. had a loss on sale of bond to Garden Co. of 20000 (1000000 - 980000)

Net income of Willy Co. = 4500000 (income from operations) + 420000 (interest received) - 582000 (ammortisation expense) - 20000 (loss on sale of bond)

= $4318000

So, we have to add both company's net profit to get consolidated net profit

Consolidated net profit = 4318000 +600000

= 4918000