On January 1, 2017, Fred sold $15,000 in land to Herman for $22,000. Herman is s

Question

On January 1, 2017, Fred sold $15,000 in land to Herman for $22,000. Herman is still holding this land.

On January 1, 2018, Herman acquired $20,000 (face value) of Fred's bonds in the open market. These bonds had an 8 percent cash interest rate. On the date of repurchase, the liability was shown within Fred's records at $21,386, indicating an effective yield of 6 percent. Herman's acquisition price was $18,732 based on an effective interest rate of 10 percent.

Herman indicated earning a net income of $25,000 within its 2018 financial statements. The subsidiary also reported a beginning Retained Earnings balance of $300,000, dividends of $4,000, and common stock of $100,000. Herman has not issued any additional common stock since its takeover. The parent company has applied the equity method to record its investment in Herman.

Prepare consolidation worksheet adjustments for 2018.

Calculate the amount of consolidated net income attributable to the noncontrolling interest for 2018. In addition, determine the ending 2018 balance for noncontrolling interest in the consolidated balance sheet.

Determine the consolidation worksheet adjustments needed in 2019 in connection with the intra-entity bonds.

Explanation / Answer

Solution:

Preparing the Consolidation Worksheet Adjustments for 2018:

Consolidation Entries:

Calculation of the Amount of Consolidated Net Income Attributable to the Non Controlling Interest for 2018:

Determining the Consolidaton Worksheet Adjustments Needed in 2019 in Connection With the Intra Entity bonds:

The balances in the individual records as of December 31, 2019 pertaining to the Intra-entity bonds are as follows:

The adjustment to recognize the original gain by the parent can be computed as follows:

Allocation of Acquisition-date Excess Fair Value   Consideration transferred $312,000 Noncontrolling interest fair value 208,000 Acquisition-date fair value $520,000 Book value acquired 300,000 Fair value in excess of book value $220,000 Excess allocated to patents based Life Annual Excess Amortization on fair value 90,000 12 Years $7,500 Customer list $130,000 10 Years 13,000 Total $20,500

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