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Consolidation worksheet for loss on constructive retirement of subsidiary's debt with no AAP - Cost Method

Assume that a Parent company acquires 80 percent interest in its Subsidiary on January 1, 2012. On the date of acquisition, the fair value of the 80 percent controlling interest was $652,800 and the fair value of the 20 percent noncontrolling interest was $163,200. On January 1, 2012, the book value of net assets equaled $816,000 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).

On December 31, 2013, the Parent company issued $1,200,000 (face) 5 percent, five-year bonds to an unaffiliated company for $1,149,452 (i.e., the bonds had an effective yield of 6 percent). The bonds pay interest annually on December 31, and the bond discount is amortized using the straight-line method. The following schedule provides the bond-amortization schedule from the initial issuance date.

	Cash Payment	Amortization of Prem(Disc)	Interest Expense	Carrying Amount
12/31/2013				1,149,452
12/31/2014	60,000	10,110	70,110	1,159,561
12/31/2015	60,000	10,110	70,110	1,169,671
12/31/2016	60,000	10,110	70,110	1,179,781
12/31/2017	60,000	10,110	70,110	1,189,890
12/31/2018	60,000	10,110	70,110	1,200,000

On December 31, 2015, the Subsidiary paid $1,233,301 to purchase all of the outstanding parent company bonds (i.e., the bonds that had an effective yield of 4 percent). The bond premium is amortized using the straight-line method. The following schedule provides the bond-amortization schedule for the Subsidiary's bond investment.

	Cash Payment	Amortization of Prem(Disc)	Interest Income	Carrying Amount
12/31/2015				1,233,301
12/31/2016	60,000	(11,100)	48,900	1,222,201
12/31/2017	60,000	(11,100)	48,900	1,211,100
12/31/2018	60,000	(11,100)	48,900	1,200,000

The parent uses the cost method of pre-consolidation investment bookkeeping. The Parent and the Subsidiary report the following financial statements for the year ended December 31, 2016:

	Parent	Subsidiary
Income Statement
Sales	11,400,000	1,080,000
Cost of Goods Sold	(8,160,000)	(660,000)
Gross Profit	3,240,000	420,000
Operating & other expenses	(1,980,000)	(282,000)
Bond interest income		48,900
Bond interest expense	(70,110)
Total expenses	(2,050,110)	(233,100)
Income from subsidiary	24,960
Net Income	1,214,850	186,900
Retained Earnings Statement
BOY retained earnings	6,038,430	420000
Net Income	1,214,850	186,900
Dividends Declared	(960,000)	(31,200)
Ending Retained Earnings	6,293,280	575,700
Balance Sheet
Cash	1,060,261	331,149
Accounts receivable	1,800,000	480,000
Inventories	3,000,000	720,000
Property, Plant & Equipment, net	10,800,000	1,236,000
Investment in Subsidiary	652,800
Investment in Bond (net)		1,222,201
Total Assets	17,313,061	3,989,350
Accounts Payable	1,020,000	540,000
Other current liabilities	1,200,000	600,000
Bond Payable (net)	1,179,781
Other long-term liabilites	1,680,000	1,913,650
Common Stock	1,020,000	120,000
APIC	4,920,000	240,000
Retained Earnings	6,293,280	575,700
Total Liabilities and Equity	17,313,061	3,989,350

Provide the consolidation entries (ADJ - C - E - Ibond -) for the year ended December 31, 2016.

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