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4-Assume that a Parent company owns 100% of its Subsidiary. On January 1, 2016 the Parent...

4-Assume that a Parent company owns 100% of its Subsidiary. On January 1, 2016 the Parent company had a $1,000,000 (face) bond payable outstanding with a carrying value of $1,070,000. The bond was originally issued to an unaffiliated company. On that same date, the Subsidiary acquired the bond for $996,000. During 2016, the Parent company reported $630,000 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 $420,000 of (pre-consolidation) income from its own operations after recording interest income. Related to the bond during 2016, the parent reported interest expense of $110,000 while the subsidiary reported interest income of $95,000.

Determine the following amounts that will appear in the 2016 consolidated income statements.
a. Interest income from bond investment
b. Interest expense on bond payable
c. Gain (loss) on constructive retirement of bond payable
d. Consolidated net income

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Answer #1

A) As this bond is intracompany it should be eliminated in preparing group Statement. Subsidiary reported an interest income of $95,000 to be eliminated while preparing consolidated statement.

B) The Interest expense of $110,000 recorded by parent to be eliminated in consolidating since it is intracompany.

C)Gain on Constructie Retirement of bond payable

Carrying value of parent co bonds on Dec 31 -1,070,000

Price paid by subsidiary to purchase it -(996,000 )

Gain on constructive Retirement..........................=74,000

D) Consolidated net income

Inc of Parent -630,000

inc Subsidiary -420,000

gain on constructive

retirement(above)-74,000

Consolidated Net Inc=1,124,000

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