On January 1, 2017, Mona, Inc., acquired 90 percent of Lisa Company’s common stock as well as 70 percent of its preferred shares. Mona paid $66,000 in cash for the preferred stock, with a call value of 110 percent of the $50 per share par value. The remaining 30 percent of the preferred shares traded at a $35,000 fair value. Mona paid $558,000 for the common stock. At the acquisition date, the noncontrolling interest in the common stock had a fair value of $62,000. The excess fair value over Lisa’s book value was attributed to franchise contracts of $35,000. This intangible asset is being amortized over a 40-year period. Lisa pays all preferred stock dividends (a total of $9,000 per year) on an annual basis. During 2017, Lisa’s book value increased by $118,000. On January 2, 2017, Mona acquired one-half of Lisa's outstanding bonds payable to reduce the business combination's debt position. Lisa's bonds had a face value of $100,000 and paid cash interest of 10 percent per year.
These bonds had been issued to the public to yield 16 percent. Interest is paid each December 31. On January 2, 2017, these bonds had a total $83,210 carrying amount. Mona paid $53,310, indicating an effective interest rate of 8 percent. On January 3, 2017, Mona sold Lisa fixed assets that had originally cost $101,000 but had accumulated depreciation of $50,000 when transferred. The transfer was made at a price of $135,000. These assets were estimated to have a remaining useful life of 15 years. The individual financial statements for these two companies for the year ending December 31, 2018, are as follows: Mona, Inc. Lisa Company Sales and other revenues $ (502,000 ) $ (202,000 ) Expenses 221,000 121,000 Dividend income—Lisa common stock (9,900 ) 0 Dividend income—Lisa preferred stock (6,300 ) 0 Net income $ (297,200 ) $ (81,000 ) Retained earnings, 1/1/18 $ (701,000 ) $ (502,000 ) Net income (above) (297,200 ) (81,000 ) Dividends declared—common stock 93,800 11,000 Dividends declared—preferred stock 0 9,000 Retained earnings, 12/31/18 $ (904,400 ) $ (563,000 ) Current assets $ 131,419 $ 501,000 Investment in Lisa—common stock 558,000 0 Investment in Lisa—preferred stock 66,000 0 Investment in Lisa—bonds 51,781 0 Fixed assets 1,101,000 801,000 Accumulated depreciation (301,000 ) (201,000 ) Total assets $ 1,607,200 $ 1,101,000 Accounts payable $ (401,800 ) $ (145,626 ) Bonds payable 0 (100,000 ) Discount on bonds payable 0 9,626 Common stock (301,000 ) (201,000 ) Preferred stock 0 (101,000 ) Retained earnings, 12/31/18 (904,400 ) (563,000 ) Total liabilities and equities $ (1,607,200 ) $ (1,101,000 ) What consolidation worksheet adjustments would have been required as of January 1, 2017, to eliminate the subsidiary's common and preferred stocks? What consolidation worksheet adjustments would have been required as of December 31, 2017, to account for Mona's purchase of Lisa's bonds? What consolidation worksheet adjustments would have been required as of December 31, 2017, to account for the intra-entity sale of fixed assets? Assume that consolidated financial statements are being prepared for the year ending December 31, 2018. Calculate the consolidated balance for each of the following accounts: Franchises Fixed Assets Accumulated Depreciation Expenses
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| Part a | |||
| Consideration transferred for common stock | $ 558,000 | ||
| Consideration transferred for preferred stock | $ 66,000 | ||
| Noncontrolling interest in common stock | $ 62,000 | ||
| Noncontrolling interest in preferred stock | $ 35,000 | ||
| Lisa’sacquisition-date fair value | $ 721,000 | ||
| Book value of Lisa | $ 756,000 | ||
| Excess assigned to franchises | $ (35,000) | ||
| CONSOLIDATION ENTRIES 1/1/17 | |||
| Preferred Stock (Lisa) | $ 101,000 | ||
| Common Stock (Lisa) | $ 201,000 | ||
| Retained Earnings, 1/1/17 (Lisa) | $ 454,000 | ||
| Franchises | $ (35,000) | ||
| Investment in Lisa-Common Stock | $ 558,000 | ||
| Investment in Lisa-Preferred Stock | $ 66,000 | ||
| Noncontrolling Interest in Lisa, Inc | $ 97,000 | ||
| Part b | |||
| Acquisition price of bonds, 1/2/17 | $ 53,310 | ||
| Carrying amount of (Half bonds payable acquired) | $83,210/2 | $ (41,605) | |
| Loss on extinguishment of debt | $ 11,705 | ||
| Interest income—Mona ($53,310 × 8%) | (rounded) | $ 4,265 | |
| Interest expense—Lisa ($41,605 × 16%) | (rounded) | $ 6,657 | |
| Carrying amount—date of acquisition, 1/2/17 | $ 53,310 | ||
| Cash interest ($50,000 × 10%) | $ 5,000 | ||
| Effective interest (above) | $ 4,265 | $ 735 | |
| Investment in Bonds of Lisa | $ 52,575 | ||
| Bonds payable (carrying amount) | |||
| Carrying amount—date of acquisition, 1/2/17 | $ 41,605 | ||
| Cash interest ($50,000 × 10%) | $ 5,000 | ||
| Effective interest (above) | $ 6,657 | $ 1,657 | |
| Bonds payable (carrying amount as of 12/31/17) | $ 43,262 | ||
| CONSOLIDATION ENTRY B—December 31, 2017 | |||
| Bonds Payable | $ 50,000 | ||
| Interest Income (or other revenues) | $ 4,265 | ||
| Loss on Retirement of Bonds | $ 11,705 | ||
| Discount on Bonds Payable ($50,000 – $47,513) | $ 6,738 | ||
| Interest Expense | $ 6,657 | ||
| Investment in Bonds of Lisa | $ 52,575 | ||
| Part c | |||
| Cost of fixed assets | $ 101,000 | ||
| Depreciation expense | ($101,000-$50,000)/15 | $ 3,400 | |
| Accumulated depreciation | $50,000+$3,400 | $ 53,400 | |
| December 31, 2017 book values based on transfer price: | |||
| Cost of fixed assets | $ 135,000 | ||
| Depreciation expense (10‑year life) | $135,000/15 | $ 9,000 | |
| Accumulated depreciation | $ 9,000 | ||
| Gain on transfer of fixed assets | $135,000-$51,000 Book value | $ 84,000 | |
| CONSOLIDATION ENTRY TA—December 31, 2017 | |||
| Gain on Transfer of Fixed Assets (to remove) | $ 84,000 | ||
| Accumulated Depreciation ($53,400 – $10,000) | $ 44,400 | ||
| Depreciation Expense ($9,000 – $3,400) | $ 5,600 | ||
| Fixed Assets ($135,000 – $101,000) | $ 34,000 | ||
| Part d | |||
| Original allocation to franchises (given) | $ 35,000 | ||
| Amortization ($35,000/40 Years*2) | $ (1,750) | ||
| Consolidated franchises—12/31/18 | $ 33,250 | ||
| Fixed assets (book values): | |||
| Mona, Inc. | $ 1,101,000 | ||
| Lisa Co. | $ 801,000 | ||
| Reduction necessitated by intra-entity sale | $135,000-$101,000 | $ (34,000) | |
| Consolidated fixed assets—12/31/18 | $ 1,868,000 | ||
| Accumulated depreciation (book values): | |||
| Mona, Inc | $ 301,000 | ||
| Lisa Co. | $ 201,000 | ||
| Increase needed to eliminate intra-entity sale | $ 37,600 | ||
| Consolidated Acc.Depr.—12/31/18 | $ 539,600 | ||
| Expenses (book values): | |||
| Mona, Inc | $ 221,000 | ||
| Lisa Co. | $ 121,000 | ||
| Recognition of amortization on franchises | $ 875 | ||
| Elimination of interest expense on intercom- | |||
| pany debt ($43,262 [see part b] × 16%) | $ (6,922) | ||
| Elimination of excess depreciation from | $ (5,600) | ||
| intra-entity transfer of fixed assets | |||
| ($9,000– $3,400) | |||
| Consolidated expenses | $ 330,353 | ||
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