Problem 6-44 (LO 6-3) Pavin acquires all of Stabler’s outstanding shares on Janu
ID: 2557654 • Letter: P
Question
Problem 6-44 (LO 6-3)
Pavin acquires all of Stabler’s outstanding shares on January 1, 2015, for $660,000 in cash. Of this amount, $50,000 was attributed to equipment with a 10-year remaining life and $60,000 was assigned to trademarks expensed over a 20-year period. Pavin applies the partial equity method so that income is accrued each period based solely on the earnings reported by the subsidiary.
On January 1, 2018, Pavin reports $500,000 in bonds outstanding with a carrying amount of $464,000. Stabler purchases half of these bonds on the open market for $241,000.
During 2018, Pavin begins to sell merchandise to Stabler. During that year, inventory costing $160,000 was transferred at a price of $200,000. All but $30,000 (at sales price) of these goods were resold to outside parties by year-end. Stabler still owes $53,000 for inventory shipped from Pavin during December.
The following financial figures are for the two companies for the year ending December 31, 2018. Dividends were both declared and paid during the current year.
Pavin
Stabler
Revenues
$
(800,000
)
$
(545,000
)
Cost of goods sold
475,000
260,000
Expenses
145,000
178,500
Interest expense—bonds
56,000
0
Interest income—bond investment
0
(24,000
)
Loss on extinguishment of bonds
0
0
Equity in Stabler’s income
(130,500
)
0
Net income
$
(254,500
)
$
(130,500
)
Retained earnings, 1/1/18
$
(365,000
)
$
(401,000
)
Net income
(254,500
)
(130,500
)
Dividends paid
175,000
97,000
Retained earnings, 12/31/18
$
(444,500
)
$
(434,500
)
Cash and receivables
$
237,000
$
55,000
Inventory
195,000
107,000
Investment in Stabler
684,500
0
Investment in Pavin bonds
0
245,000
Land, buildings, and equipment (net)
265,000
561,000
Trademarks
0
0
Total assets
$
1,381,500
$
968,000
Accounts payable
$
(128,000
)
$
(273,500
)
Bonds payable
(500,000
)
(120,000
)
Discount on bonds
20,000
0
Common stock
(329,000
)
(140,000
)
Retained earnings (above)
(444,500
)
(434,500
)
Total liabilities and stockholders’ equity
$
(1,381,500
)
$
(968,000
)
Note: Credits are indicated by parentheses.
Prepare a worksheet to produce consolidated balance
a. Assuming that both parties use the straight-line method, what consolidation entry would be required on December 31, 2018, because of these bonds? Assume that the parent is not applying the equity method.
Problem 6-44 (LO 6-3)
Pavin acquires all of Stabler’s outstanding shares on January 1, 2015, for $660,000 in cash. Of this amount, $50,000 was attributed to equipment with a 10-year remaining life and $60,000 was assigned to trademarks expensed over a 20-year period. Pavin applies the partial equity method so that income is accrued each period based solely on the earnings reported by the subsidiary.
On January 1, 2018, Pavin reports $500,000 in bonds outstanding with a carrying amount of $464,000. Stabler purchases half of these bonds on the open market for $241,000.
During 2018, Pavin begins to sell merchandise to Stabler. During that year, inventory costing $160,000 was transferred at a price of $200,000. All but $30,000 (at sales price) of these goods were resold to outside parties by year-end. Stabler still owes $53,000 for inventory shipped from Pavin during December.
The following financial figures are for the two companies for the year ending December 31, 2018. Dividends were both declared and paid during the current year.
Pavin
Stabler
Revenues
$
(800,000
)
$
(545,000
)
Cost of goods sold
475,000
260,000
Expenses
145,000
178,500
Interest expense—bonds
56,000
0
Interest income—bond investment
0
(24,000
)
Loss on extinguishment of bonds
0
0
Equity in Stabler’s income
(130,500
)
0
Net income
$
(254,500
)
$
(130,500
)
Retained earnings, 1/1/18
$
(365,000
)
$
(401,000
)
Net income
(254,500
)
(130,500
)
Dividends paid
175,000
97,000
Retained earnings, 12/31/18
$
(444,500
)
$
(434,500
)
Cash and receivables
$
237,000
$
55,000
Inventory
195,000
107,000
Investment in Stabler
684,500
0
Investment in Pavin bonds
0
245,000
Land, buildings, and equipment (net)
265,000
561,000
Trademarks
0
0
Total assets
$
1,381,500
$
968,000
Accounts payable
$
(128,000
)
$
(273,500
)
Bonds payable
(500,000
)
(120,000
)
Discount on bonds
20,000
0
Common stock
(329,000
)
(140,000
)
Retained earnings (above)
(444,500
)
(434,500
)
Total liabilities and stockholders’ equity
$
(1,381,500
)
$
(968,000
)
Note: Credits are indicated by parentheses.
Prepare a worksheet to produce consolidated balance
Explanation / Answer
Consolidation entry for bonds:
Impact on profit and loss account:
Interest income reported by Stabler on account of the bonds, i.e. 24,000 will be eliminated against the interest expense reported of 56,000 reported by the parent.
In the balance sheet:
Investment asset in Stabler will be eliminated fully, i.e. full cost amount of 241,000
On the liability side, the value of bond liability of parent will reduce by 50%, i.e. 464,000/2, i.e. 232,000. Balance 9,000 will be reduced from consolidated reserves.