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Assume that a parent company owns 80 percent of its subsidiary. The parent company uses the...

Assume that a parent company owns 80 percent of its subsidiary. The parent company uses the equity method to account for its investment in subsidiary. On January 1, 2012, the parent company issued to an unaffiliated company $1,000,000 (face value) 10 year, 10 percent bond payable for a $61,000 premium. The bonds pay interest in December 31 of each year. On January 1, 2015, the subsidiary acquired 40 percent of the bonds for $386,000. Both companies use straight-line amortization.

In preparing the consolidated financial statements for the year ended December 31, 2016, what is the consolidation entry adjustment?

Solutions

Expert Solution

*Every amount pertains to $

Step: 1. Cash 1061000 a/c dr. (Including premium)

To premium on bonds payable a/c 61000

To bonds payable(parent's bonds a/c 1000000

2. Investment in parent bonds a/c dr. 386000

To discount on bond investment a/c 14000

To cash (subsidiary company) 400000 ( 40% of parent's bonds face value)

Step 2: Parent's bonds issue

1) total premium of issue = 61000

annual amortization = 6100 (61000/10 years)

2) amortization recognized = 30500 ( 1-1-2012 to 31-12-2016 = 5 years)

un amortized portion = 30500 (61000 - 30500)

un amortized portion of subsidiary company = 12200 ( 40% of 30500)

Step 3: Subsidiary's bond purchase

1) total discount at purchase = 14000

annual amortization = 2800 (14000 / 5 years)

2) amortization recognized = 2800 ( 2800 * 12 /12 )

1) - 2) un amortized portion = 11200 (14000 - 2800)

Step 4: Consolidated entry adjustments

Debit/(Credit) Parent co. Subsidiary co. Adjustments Consolidated
Balance sheet
1.Assets
a. Investment in parent debt 386000 (386000) -
b. bond discount (un amortized @21-31-2016) (11200) 11200 0
2.Liabilities
a. bond payable (386000) 386000 -
b. premium/bond payable (un amortized@ 12-31-2016) (12200) (12200) 0
Income Statement: Interest income (38600) 38600 -
Interest expense 38600 (38600) -
(Gain)loss on constructive retirement (23400)

*23400 = 12200 + 11200 of un amortized value of parents and subsidiary company's premium and discounted respectively

ekkarill92 answered 1 year ago
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