Question

On January 1, 2013, Mona, Inc., acquired 80 percent of Lisa Company’s common stock as well as 60 percent of its preferred shares. Mona paid $65,000 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 $34,000 fair value. Mona paid $552,800 for the common stock. At the acquisition date, the noncontrolling interest in the common stock had a fair value of $138,200. The excess fair value over Lisa’s book value was attributed to franchise contracts of $40,000. This intangible asset is being amortized over a 40-year period. Lisa pays all preferred stock dividends (a total of $8,000 per year) on an annual basis. During 2013, Lisa’s book value increased by $50,000.

On January 2, 2013, 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 10 percent per year. These bonds had been issued to the public to yield 14 percent. Interest is paid each December 31. On January 2, 2013, these bonds had a total $88,350 book value. Mona paid $53,310, indicating an effective interest rate of 8 percent.

On January 3, 2013, Mona sold Lisa fixed assets that had originally cost $100,000 but had accumulated depreciation of $60,000 when transferred. The transfer was made at a price of $120,000. 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, 2014, are as follows:

	Mona, Inc.		Lisa Company
Sales and other revenues	$	(500,000)	$	(200,000)
Expenses		220,000		120,000
Dividend income—Lisa common stock		(8,000)		0
Dividend income—Lisa preferred stock		(4,800)		0
Net income	$	(292,800)	$	(80,000)
Retained earnings, 1/1/14	$	(700,000)	$	(500,000)
Net income		(292,800)		(80,000)
Dividends declared—common stock		92,800		10,000
Dividends declared—preferred stock		0		8,000
Retained earnings, 12/31/14	$	(900,000)	$	(562,000)
Current assets	$	130,419	$	500,000
Investment in Lisa—common stock		552,800		0
Investment in Lisa—preferred stock		65,000		0
Investment in Lisa—bonds		51,781		0
Fixed assets		1,100,000		800,000
Accumulated depreciation		(300,000)		(200,000)
Total assets	$	1,600,000	$	1,100,000
Accounts payable	$	(400,000)	$	(144,580)
Bonds payable		0		(100,000)
Discount on bonds payable		0		6,580
Common stock		(300,000)		(200,000)
Preferred stock		0		(100,000)
Retained earnings, 12/31/14		(900,000)		(562,000)
Total liabilities and equities	$	(1,600,000)	$	(1,100,000)

a. b. & c.

Prepare consolidation worksheet adjustment for 2013 to record the following. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1. to eliminate the subsidiary’s common and preferred stocks.

2. to account for Mona’s purchase of Lisa’s bonds.

3. to account for the intra-entity sale of fixed assets.

                 

Answer 1

1. Book Value = Subsidiary's Opening retained earnings + Common stock + increase in book value

= $500,000 + 200,000 + 50,000

= $ 750,000

2. Bond acquisition price = $53,310

Book value of bond payable (88350/2) = $44,175

Loss = $9,135

Interest Income - Mona (53,310 *8%) = $4,264

  Interest Expenses - Lisa (44,175*14%) =$6,184

Investment in Lisa Bond(BV)

Book Value = $53,310

Cash interest (50000*10%) = 5000

Interest income = 4264------------- = 736

_________________

Investment in Lisa (BV) $ 52,574

________________

Bond payable (BV)

BV - Date of acquisition =    $44,175

Cash interest (50000*10%) = 5000

Interest = 6184 ------------- = 1184

Bond Payable book value on 12/31 =   $45,359

3. Historical cost figure

Cost of fixed assets = $100,000

Depreciation expenses (40000/10 yrs life) = 4,000

Accumulated depreciation includind current exp = 64,000

BV based on transfer price

Cost of fixed assets = $120,000

Depreciation expenses (10 yrs life) = 12,000

Accumulated depreciation includind current exp = 12,000

Gain on transfer (120,000-40,000) = 80,000