Passion Inc. purchased $500,000 face value bonds from its subsidiary Sweetness for $479,000. Over the life of the bonds, the carrying values will differ between the companies' books due to different amortization periods. The consolidation adjustments dispose of this difference under the agency or par value methods. Under agency, gains or losses are realized each period. Under par value, the difference is fully adjusted with the NCI portion attributed to non-controlling interest. Interest income/expense differences are also allocated between retained earnings and non-controlling interest each period.

1. Chapter 6 – Subsequent-Year Consolidations: General Approach
SSP 6A-1
1. The total available votes and Numbers’ share thereof are as follows:
Total Available Votes Numbers Inc.’s Votes
Class Shares
Outstanding
Votes per
Share
Total
Votes
Shares
Held
Votes per
Share
Total
Votes
A 600,000 1 600,000 40,000 1 40,000
B 50,000 15 750,000 44,000 15 660,000
650,000 1,350,000 84,000 700,000
Numbers Incorporated owns 700,000 ÷ 1,350,000 = 51.85% of the votes, and therefore controls 212°F
Corporation.
2. The ownership share for consolidation purposes (or for equity-basis earnings) is the proportion of residual
earnings that accrues to Numbers. Preferred shares are a prior claim and therefore do not participate in residual
earnings. The two classes of common shareholders participate equally in earnings. Therefore, Numbers’
ownership share is simply the investor’s proportionate share of the total shares outstanding: 84,000 ÷ 650,000
= 12.923%.
3. The amount of the non-controlling interest is the sum of the preferred share redemption value (call price) plus
87.077% of the residual shareholders’ equity after deducting the prior claim of the preferred shares:
Preferred shares:
1,000,000 shares × $12 per share call price $ 12,000,000
Residual common equity:
Total 212°F shareholders’ equity $125,000,000
Less preferred share redemption value (12,000,000)
Residual common equity 113,000,000
Non-controlling interest percentage ×87.077% 98,397,010
Non-controlling interest amount $110,397,010
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2. Chapter 6 – Subsequent-Year Consolidations: General Approach
SSP 6B-1
The $500,000 face value bonds were purchased by Passion for $479,000, a discount of $21,000. The
discount will be amortized by Passion over the six years remaining to maturity at $3,500 per year. On
Sweetness’s books, the original issue discount (which is also $21,000) will be amortized over 10 years at
$2,100 per year. Over the life of the bonds, the carrying value of the $500,000 bonds on the issuing
(Sweetness, the subsidiary) and investing (Passion, the parent) companies’ books will be as follows:
Sweetness Passion
Original issue price, January 1, 20X5 $479,000
4 years’ accumulated amortization 8,400
Carrying value, December 31, 20X8 487,400
Purchase price, December 31, 20X8 $479,000
2 years’ amortization 4,200 7,000
Carrying value, December 31, 20X10 491,600 486,000
4 years’ amortization 8,400 14,000
Carrying value, December 31, 20X14 $500,000 $500,000
The consolidation adjustments must dispose of the difference between the carrying values of the bonds on the
two companies’ books. Assuming that the bonds are carried net of the discount on each company’s books, the
adjustments under each method are as follows:
Agency method:
December 31, 20X8
Bonds payable 487,400
Bond investment 479,000
Gain on bond retirement 8,400
Note: 30% of the gain of $8,400, i.e., $2,520, is attributable to the NCI. Therefore, when the income summary account is
being closed and net income is transferred to retained earnings and NCI, respectively, the NCI’s share of the gain should be
included in the amount transferred to the NCI account on the SFP.
December 31, 20X10
Bonds payable 491,600
Bond investment 486,000
Non-controlling interest (5,600 × 30%) 1,680
Retained earnings 3,920
Interest income (including $3,500 amortization) 63,500
Interest expense (including $2,100 amortization) 62,100
Non-controlling interest [(3,500 - 2,100) × 30%] 420
Retained earnings 980
December 31, 20X14
Bonds payable 500,000
Bond investment 500,000
Interest income (including $3,500 amortization) 63,500
Interest expense (including $2,100 amortization) 62,100
Non-controlling interest [(3,500 - 2,100) × 30%] 420
Retained earnings 980
Par-value method:
December 31, 20X8
Bonds payable 487,400
Bond investment 479,000
Gain on bond retirement 8,400
Note: 30% of the difference between $500,000 and $487,400, i.e., 30% of $12,600, which is $3,780, is attributable to the NCI.
Therefore, when the income summary account is being closed and net income is transferred to retained earnings and NCI,
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3. Chapter 6 – Subsequent-Year Consolidations: General Approach
respectively, the NCI’s share of $3,780 should be part of the amount transferred to the NCI account on the SFP.
December 31, 20X10
Bonds payable 491,600
Bond investment 486,000
Non-controlling interest (8,400 × 30%) 2,520
Retained earnings 3,080
Interest income (including $3,500 amortization) 63,500
Interest expense (including $2,100 amortization) 62,100
Non-controlling interest (2,100 × 30%) 630
Retained earnings 770
December 31, 20X14
Bonds payable 500,000
Bond investment 500,000
Interest income (including $3,500 amortization) 63,500
Interest expense (including $2,100 amortization) 62,100
Non-controlling interest (2,100 × 30%) 630
Retained earnings 770
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