Consolidated amounts when affiliate’s debt is acquired from non-affiliate Assume
ID: 2566936 • Letter: C
Question
Consolidated amounts when affiliate’s debt is acquired from non-affiliate
Assume that a Parent company owns 75 percent of its Subsidiary. On January 1, 2016, the Parent company had a $100,000 (face) 8 percent bond payable outstanding with a carrying value of $96,600. Several years ago, the bond was originally issued to an unaffiliated company for 92 percent of par value. On January 1, 2016, the Subsidiary acquired the bond for $92,000.
During 2016, the Parent company reported $400,000 of (pre-consolidation) income from its own operations (i.e., prior to any equity method adjustments by the Parent company) and after recording interest expense. The Subsidiary reported $120,000 of (pre-consolidation) income from its own operations after recording interest income. Related to the bond during 2016, the parent reported interest expense of $8,500 while the subsidiary reported interest income of $9,200.
Determine the following amounts that will appear in the 2016 consolidated income statement:
a. Interest income from bond investment
$Answer
b. Interest expense on bond payable
$Answer
c. Gain (loss) on constructive retirement of bond payable
Use a negative sign with answer to indicate a loss.
$Answer
d. Controlling interest in consolidated net income
$Answer
e. Noncontrolling interest in consolidated net income
Explanation / Answer
Determining the Following Amounts that Will Appear in the 2016 Consolidated Income Statement:
a) Interest Income From Bond Investment:
According to the Information Given, the Subsidiary Reported Interest Income from the Bond Investment is $9,200 in 2016, and Parent Company acquires Subsidiary Company in 2016. So, the Interest Income will be Zero.
b) Interest Expense on Bonds Payable:
Parent Company Reported Interest Expense on Bonds Payable is $8,500 in 2016, and Parent Company acquires Subsidiary Company in 2016. So, the Interest Expense will be Zero.
c) Gain (loss) on Constructive Retirement of Bond Payable:
Gain (loss) on constructive retirement of bond payable=$96,600-$92,000=$4600
d) Controlling Interest in Consolidated Income:
Parent Company Net Income (Pre-Consolidation)
$400,000
Subsidiary Company Net Income (Pre-Consolidation)
$120,000
Interest Expense
$8,500
Less: Interest Income
($9,200)
Add: Gain on constructive retirement of bond payable
$4,600
Controlling interest in consolidated net income
$523,900
Parent Company Net Income (Pre-Consolidation)
$400,000
Subsidiary Company Net Income (Pre-Consolidation)
$120,000
Interest Expense
$8,500
Less: Interest Income
($9,200)
Add: Gain on constructive retirement of bond payable
$4,600
Controlling interest in consolidated net income
$523,900