On January 1, 2018, A. Hamilton, Inc. (\"AHI\") provides a loan for $3,000,000 t
ID: 2585744 • Letter: O
Question
On January 1, 2018, A. Hamilton, Inc. ("AHI") provides a loan for $3,000,000 to Reynolds Manufacturing Corp. ("RMC"). The terms of the loan require payment of the loan no later than January 1, 2023. RMC was in terrible financial condition and would cease operations absent securing a loan. Prior to requesting a loan from AHI, RMC exhausted all other possible avenues for funding. The terms of the loan agreement include provisions that require RMC to provide AHI with the following from January 1, 2018 through January 1, 2023: (i) 6 percent annual interest on the principal amount of the loan, which reflects a market rate of interest; (ii) 100 percent participation rights to RMC's profits less $17,000 in a guaranteed annual dividend to RMC's common shareholders; and (iii) complete decision-making authority over RMC's operations and financing decisions.
At the end of the term of the loan, AHI is given the right to acquire RMC or, in its discretion, extend the term of the original loan an additional 5 years. At the date the loan was extended to RMC, RMC's common stock had an estimated fair value of $136,000 and a book value of $40,000. The $96,000 difference was attributed to an asset with a 3-year useful life remaining ("Asset"). At January 1, 2018, the balance sheets for AHI and RMC are as follows:
In preparing the consolidation worksheet as of December 31, 2018 for AHI and RMC, which of the following worksheet entry descriptions reflects what AHI should do to consolidate the financial statements?
January 1, 2018 Balance Sheets Assets AHI RMC Cash 97,000 78,000 Accounts receivable 137,000 265,000 Loan receivable from AHI 3,000,000 - Asset with 3-year useful life remaining - 96,000 Equipment (net) 3,287,000 2,834,000 Total assets 6,521,000 3,273,000Liabilities and owner's equity AHI RMC Accounts payable (219,000 ) (233,000 ) Long-term debts (688,000 ) (3,000,000 ) Common stock (4,800,000 ) (34,000 ) Retained earnings, 1/1/18 (814,000 ) (6,000 ) Total liabilities and equity (6,521,000 ) (3,273,000 )
Explanation / Answer
To consolidate the financial statements of AHI and RMC we need to eliminate the long-term receivable and debt representing AHI's initial investment in RMC from the financial statements of AHI and RMC. Thus the correct option is D. The consolidation entry P is recorded to eliminate the long term receivable and debt representing AHI's initial investment in RMC as follows:-
Loan Receivable from RMC $3,000,000
Long-term debt $3,000,000