Consolidations Review Problem

Consolidations Review Problem: (20 points).

Penny purchased 80% of the outstanding common stock of Spice on 1/1/19 for $18.7 million in cash. Spice reported the following income and dividends for 2019 and 2020 (in 000’s):

2019 2020
Net Income 2,000 4,000
Dividends 500 1,500

The following are the fair value/book value amounts for Spice on 1/1/19 (in 000’s):

Book Value Fair Values
Cash 600 600
Receivables 1,500 1,500
Inventory (FIFO) 1,200 1,900
Plant & Equipment 10,000 12,000
Less: Accumulated Deprn. 3,000

Patent 4,000
Lease at below market rent 1,000
Trademark 400
Total Assets $10,300

Accounts Payable 1069.003 1069.003
Bond Payable 901.997 ?

Common stock 5400
Retained Earnings 2929

Total Liabilities & SHE $10,300

Each of the 1,000, $1,000 face bonds pays interest semi-annually on 6/30 and 12/31 and had 15 years until maturity at the Spice acquisition date. The bond was originally issued when the market rate was 6% with a coupon rate of 5%. On 1/1/19, the market rate was 3%.

The plant & equipment had remaining useful lives of 5 years at 1/1/19 and the patent has a 10 year useful life at 1/1/19. Customer relationships estimated useful life is 4 years. Trademark has an indefinite life. The remaining lease term of the lease whose rent is below market is two years at 1/1/19.

a. Prepare the required consolidation entries for this subsidiary for 2020. All numbers on the worksheet are in 000’s. These should be neatly written on pages separately from the worksheet. Show all of your work in an organized, clear manner.
b. Prepare the consolidated worksheet.