Chapter 6, Problem 61P

a.

To determine

Compute the amount of gain or loss that must be recognized in the consolidated financial

 statements for the constructive retirement of debt and mention the year in which this gain

or loss realized.

Explanation of Solution

Consolidated financial statements are a group of entities financial statements that are presented as those of a single economic entity. They are the financial statements of a group in which the parent company and its subsidiaries introduce their assets, liabilities, equity, revenue, expenses and cash flows as those of a single business organization.

The amortization table for the bonds issued by the Parent (represents 100% of the

bonds issued) is as follows:

Date	Cash Payment	Amortization of (prem) disc	Interest Expense	Carrying Amount
1 Jan 2014				$\$312,000$
31 Dec 2014	$\$21,000$	$\$1,200$	$\$19,800$	$\$310,800$
31 Dec 2015	$\$21,000$	$\$(1,000)$	$\$19,800$	$\$309,600$
31 Dec 2016	$\$21,000$	$\$(1,000)$	$\$19,800$	$\$308,400$
31 Dec 2017	$\$21,000$	$\$(1,000)$	$\$19,800$	$\$307,200$
31 Dec 2018	$\$21,000$	$\$(1,000)$	$\$19,800$	$\$306,000$
31 Dec 2019	$\$21,000$	$\$(1,000)$	$\$19,800$	$\$304,800$

Table (1)

The amortization table for the bonds purchased by the Subsidiary (represents 60% of the bonds originally issued by the Parent):

Date	Cash Payment	Amortization of (prem) disc	Interest Income	Carrying Amount
1 Jan 2019				$\$181,800$
31 Dec 2019	$\$12,600$	$\$360$	$\$12,240$	$\$181,440$

Thus, the gain on constructive retirement of the bonds on January 1, 2019 is equal

to $1,800 (i.e., [60% of $306,000] − $181,800). Hence, the amount of gain that must be recognized in the consolidated financial statements for the constructive retirement of debt is $1,800 which is realized on Jan 1, 2019.

b.

To determine

Prepare the bond-related journal entries recorded in the parent and the subsidiary's pre-

consolidation financial statements for the year ended 31 December 2019.

Explanation of Solution

The required journal entries on the pre-consolidation financial statements of the Parent and Subsidiary during 2019 are as follows:

Parent:

Date	Account title and Explanation	Post Ref	Debit ($)	Credit ($)
	Interest expense		$\$19,800$
	Bond Premium		$\$1,200$
	Cash			$\$21,000$
	(Recognize interest expense and payment of cash related to bond payable )
	Equity Investment		$\$161,440$
	Equity Income			$\$161,440$
	(Equity method income (i.e., (80% of 200,000) + 1,800 constructive gain −360 recognized via amortization of premium and discount during yearsubsequent to I-C purchase)

Table (1)

Subsidiary:

Date	Account title and Explanation	Post Ref	Debit ($)	Credit ($)
	Bond Investment		$\$181,800$
	Cash			$\$181,800$
	(Record purchase of 60% of parent’s bonds)
	Cash		$\$12,600$
	Interest Income			$\$12,240$
	Bond Investment			$\$360$
	(Recognize interest income and receipt of cash related to bondinvestment)

Table (2)

c.

To determine

Calculate the controlling interest in consolidated net income and the non-controlling

interest in consolidated net revenue for the year ended 31 Dec 2019.

Explanation of Solution

Consolidated net income is the sum of the parent company's net net income excluding any income from the subsidiaries recognized in its individual financial statements plus the net income of its subsidiaries determined after excluding unrealized inventory gain, intra-group income. Consolidated net income is reported for periods after acquisition on the consolidated income statement. The consolidated net income is divided into two components when the subsidiary is not wholly owned: consolidated net income attributable to controlling interest and consolidated net income attributable to non-controlling interest.

A non-controlling interest, also known as NCI or minority interest is a stance of possession where a corporate shareholder owns less than 50% of outstanding shares and can only impact management decisions rather than controlling them. Non-controlling interest (NCI) is the portion of the equity ownership in a subsidiary that is not attributable to the parent company, which has a controlling interest (greater than 50% but less than 100%) and consolidates the financial results of the subsidiary with its own.

A controlling interest is a shareholding interest in a corporation with sufficient voting stock shares to take precedence in the action of any shareholder. A majority (over 50 per cent) of the voting shares is always a controlling interest

The computations of income attributable to the controlling interest are as follows:

Particulars	Amount ($)
100% of Net income (P) alone	$\$450,000$
p% of Subsidiary net income alone	$160,000$
Less: I-C Int. Income in NI	$(12,240)$
Add: I-C Int Expense in NI	$11,880$
Add: Gain on Constr. Retirement	$1,800$
Controlling Interest NI	$\underset{\_}{\underset{\_}{\$611,440}}$

Table (1)

Calculate the income attributable to the non-controlling interest:

$\begin{array}{c}\text{Income attributable to the non-controlling interest}=20\%\times \$200,000\\ =\$40,000\end{array}$

Hence, the income attributable to the controlling interests is $\$611,440$ and the income attributable to the non-controlling interest is $\$40,000$.

Working notes:

Parent’s owned 80% of subsidiary.

Subsidiary’s pre-consolidation net income is $\$200,000$

Parent’s pre-consolidation net income is $\$450,000$

d.

To determine

Prepare the consolidation entries for the year ended Dec 31, 2019.

Explanation of Solution

Consolidated financial statements are a group of entities financial statements that are presented as those of a single economic entity. They are the financial statements of a group in which the parent company and its subsidiaries introduce their assets, liabilities, equity, revenue, expenses and cash flows as those of a single business organization.

Consolidated accounting is used to club a parent company's financial information and one or more subsidiaries. The parent prepares consolidated financial statements through adjustment of entries and elimination of transactions between companies.

The required consolidation journal entries are as follows:

Date	Account title and Explanation	Post Ref	Debit ($)	Credit ($)
	Equity Income from Subsidiary		$\$161,440$
	Income attributable to NCI		$\$40,000$
	Investment in Subsidiary			$\$161,440$
	Non-controlling interest			$\$40,000$
	[E]  Common Stock (S) @ BOY		$\$500,000$
	Retained Earnings (S) @BOY		$\$400,000$
	Investment in Subsidiary @BOY			$\$720,000$
	Non-controlling interest @ BOY			$\$180,000$
	[Ibond]  Bond Payable (net)		$\$182,880$
	Interest income		$\$12,240$
	Investment in bonds			$\$181,440$
	Interest expense			$\$11,880$
	Gain on Constructive Retirement on Jan 1, 2019			$\$1,800$

Table (1)