Highlight, Inc, owns all outstanding stock of Kiort Corporation. The two compani

Question

Highlight, Inc, owns all outstanding stock of Kiort Corporation. The two companies report the following balances for the year ending December 31, 2017: Revenues and interest income (670,000) (390, 000) 221,000 (32,000]) $ (250, 000) (201,000) Operating and interest expense 540,000 Other gains and losses Net income (120,000) Note: Parentheses indicate a credit balance. On January 1, 2017, Highlight acquired on the open market bonds for $108,000 originally issued by Kiort. This investment had an effective rate of 8 percent. The bonds had a face value of $100,000 and a cash interest rate of 9 percent At the date of acquisition, these bonds were shown as liabilities by Kiort with a book value of $84,000 (based on an effective rate of 11 percent). Determine the balances that should appear on a consolidated income statement for 2017 Re

Explanation / Answer

When parent purchasd subsidiary's bonds, in the consolidated books it should be treated as extinguishment of liability and loss or gain on such transaction should be recognised.

In the case book value of 84000 bonds purchased for 108000, which means loss on extinguishment of liability= 108000-84000= 24000

Hence in the consolidated other gains and loss reported amount= -120000-32000+24000= -128000

Interest expense recognised by the subsidiary and the interest revenue recognised by the parent should also be eliminated:

Interest expense recorded by the subsidiary= carrying value of bonds* effective interest rate= 84000*11%= 9240

Interest revenue recorded by the parent= carrying value of bonds* effective interest rate= 108000*8%= 8640

Consolidated revenues and interest income= -670000-390000+8640= -1051360

Consolidated operating and interest expense= 540000+221000-9240= 751760

Net income= -1051360+751760-128000= -427600

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