Question

On January 1, 2017, Mona, Inc., acquired 80 percent of Lisa Company’s common stock as well as 60 percent of its preferred shares. Mona paid $76,000 in cash for the preferred stock, with a call value of 110 percent of the $50 per share par value. The remaining 40 percent of the preferred shares traded at a $45,000 fair value. Mona paid $588,000 for the common stock. At the acquisition date, the noncontrolling interest in the common stock had a fair value of $147,000. The excess fair value over Lisa’s book value was attributed to franchise contracts of $77,000. This intangible asset is being amortized over a 20-year period. Lisa pays all preferred stock dividends (a total of $19,000 per year) on an annual basis. During 2017, Lisa’s book value increased by $65,000.

On January 2, 2017, Mona acquired one-half of Lisa's outstanding bonds payable to reduce the business combination's debt position. Lisa's bonds had a face value of $100,000 and paid cash interest of 8 percent per year. These bonds had been issued to the public to yield 10 percent. Interest is paid each December 31. On January 2, 2017, these bonds had a total $93,660 carrying amount. Mona paid $53,465, indicating an effective interest rate of 6 percent.

On January 3, 2017, Mona sold Lisa fixed assets that had originally cost $111,000 but had accumulated depreciation of $70,000 when transferred. The transfer was made at a price of $142,000. These assets were estimated to have a remaining useful life of 10 years.

The individual financial statements for these two companies for the year ending December 31, 2018, are as follows:

	Mona, Inc.				Lisa Company
Sales and other revenues	$	(522,000	)		$	(222,000	)
Expenses		231,000				131,000
Dividend income—Lisa common stock		(16,800	)			0
Dividend income—Lisa preferred stock		(11,400	)			0
Net income	$	(319,200	)		$	(91,000	)
Retained earnings, 1/1/18	$	(711,000	)		$	(522,000	)
Net income (above)		(319,200	)			(91,000	)
Dividends declared—common stock		103,800				21,000
Dividends declared—preferred stock		0				19,000
Retained earnings, 12/31/18	$	(926,400	)		$	(573,000	)
Current assets	$	141,419			$	511,000
Investment in Lisa—common stock		588,000				0
Investment in Lisa—preferred stock		76,000				0
Investment in Lisa—bonds		51,833				0
Fixed assets		1,111,000				811,000
Accumulated depreciation		(311,000	)			(211,000	)
Total assets	$	1,657,252			$	1,111,000
Accounts payable	$	(419,852	)		$	(119,472	)
Bonds payable		0				(100,000	)
Discount on bonds payable		0				3,472
Common stock		(311,000	)			(211,000	)
Preferred stock		0				(111,000	)
Retained earnings, 12/31/18		(926,400	)			(573,000	)
Total liabilities and equities	$	(1,657,252	)		$	(1,111,000	)

1. What consolidation worksheet adjustments would have been required as of January 1, 2017, to eliminate the subsidiary's common and preferred stocks?

2. What consolidation worksheet adjustments would have been required as of December 31, 2017, to account for Mona's purchase of Lisa's bonds?

3. What consolidation worksheet adjustments would have been required as of December 31, 2017, to account for the intra-entity sale of fixed assets?

4. Assume that consolidated financial statements are being prepared for the year ending December 31, 2018. Calculate the consolidated balance for each of the following accounts:

• Franchises
• Fixed Assets
• Accumulated Depreciation
• Expenses

Answer 1