Reference no: EM131907280

On January 1, 2018, A. Hamilton, Inc. (“AHI”) provides a loan for $3,000,000 to Reynolds Manufacturing Corp. (“RMC”). The terms of the loan require payment of the loan no later than January 1, 2023. RMC was in terrible financial condition and would cease operations absent securing a loan. Prior to requesting a loan from AHI, RMC exhausted all other possible avenues for funding. The terms of the loan agreement include provisions that require RMC to provide AHI with the following from January 1, 2018 through January 1, 2023: (i) 6 percent annual interest on the principal amount of the loan, which reflects a market rate of interest; (ii) 100 percent participation rights to RMC’s profits less $17,000 in a guaranteed annual dividend to RMC’s common shareholders; and (iii) complete decision-making authority over RMC’s operations and financing decisions. At the end of the term of the loan, AHI is given the right to acquire RMC or, in its discretion, extend the term of the original loan an additional 5 years. At the date the loan was extended to RMC, RMC’s common stock had an estimated fair value of $136,000 and a book value of $40,000. The $96,000 difference was attributed to an asset with a 3-year useful life remaining (“Asset”). At January 1, 2018, the balance sheets for AHI and RMC are as follows: January 1, 2018 Balance Sheets Assets AHI RMC Cash 97,000 78,000 Accounts receivable 137,000 265,000 Loan receivable from AHI 3,000,000 - Asset with 3-year useful life remaining - 96,000 Equipment (net) 3,287,000 2,834,000 Total assets 6,521,000 3,273,000 Liabilities and owner's equity AHI RMC Accounts payable (219,000 ) (233,000 ) Long-term debts (688,000 ) (3,000,000 ) Common stock (4,800,000 ) (34,000 ) Retained earnings, 1/1/18 (814,000 ) (6,000 ) Total liabilities and equity (6,521,000 ) (3,273,000 ) In preparing the consolidation worksheet as of December 31, 2018 for AHI and RMC, which of the following worksheet entry descriptions reflects what AHI should do to consolidate the financial statements? Multiple Choice Consolidation Entry S is recorded to eliminate the interest payment on the loan from RMC to AHI as follows: Interest expense $180,000 Interest income $180,000 Consolidation Entry P is recorded to eliminate the beginning stockholders’ equity of the VIE and recognize the 100% equity ownership of the noncontrolling interest as follows: Retained earnings – RMC 1/1/18 $6,000 Common stock – RMC $34,000 Retained Earnings-AHI $40,000 Consolidation Entry E is recorded to amortize the excess fair value allocation to the Asset over its remaining useful life as follows: Other operating expenses $32,000 Asset $32,000 Consolidation Entry A is recorded to allocate the excess fair value to the noncontrolling interest and record a credit to the Asset in connection with a fair valuation on the date AHI obtains control of RMC as follows: Noncontrolling interest $96,000 Asset $96,000 Consolidation Entry P is recorded to eliminate the long-term receivable and debt representing AHI’s initial investment in RMC as follows: Loan receivable from RMC $3,000,000 Long-term debt $3,000,000.