A parent Company owns 100 percent of its Subsidiary. During 2015, the Parent com

Question

A parent Company owns 100 percent of its Subsidiary. During 2015, the Parent company reports net income (by itself, without any investment income from its Subsidiary) of $500,000 and the subsidiary reports net income of $200,000. The parent had a bond payable outstanding on December 31, 2015, with a carrying value equal to $420,000. The subsidiary acquired the bond on December 31, 2015 for $395,000. During 2015, the Parent reported interest expense (related to the bond) of $35,000 while the subsidiary reported on interest income (related to the bond).

What is consolidated net income for the year ended December 31, 2015? (Please Show Work)

Explanation / Answer

Consolidated net income for the year ended December 31, 2015 will be equal to sum of net income of parent and its subsidiary after adjusting the amount of interest expense and interest income related to bonds payable. The calculation of consolidation net income for the year ended December 31, 2015 is shown as follows:-

Therefore, consolidated net income for the year ended December 31, 2015 is $700,000.   

Net Income of Parent Company $500,000 Add: Net Income of Subsidiary Company $200,000 Adjustments related to interest on bond: Add: Interest Expense related to bond debited in Parent Company's net income $35,000 Less: Interest Income related to bond credited in Subsidiary Company's net income ($35,000) Consolidated Net Income $700,000

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