solusi manual advanced acc zy Chap008

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solusi manual advanced acc zy Chap008

  1. 1. Chapter 08 - Intercompany Indebtedness CHAPTER 8 INTERCOMPANY INDEBTEDNESS ANSWERS TO QUESTIONS Q8-1 A gain or loss on bond retirement is reported by the consolidated entity whenever (a) one of the companies purchases its own bonds from a nonaffiliate at an amount other than book value, or (b) a company within the consolidated entity purchases the bonds of an affiliate from a nonaffiliate at an amount other than book value. Q8-2 A constructive retirement occurs when the bonds of a company included in the consolidated entity are purchased by another company included within the consolidated entity. Although the debtor still considers the bonds as outstanding, and the investor views the bonds as an investment, they are constructively retired for consolidation purposes. If bonds are actually retired, the debtor purchases its own bonds from a nonaffiliate and they are no longer outstanding. Q8-3 When bonds sold to an affiliate at par value are not eliminated, bonds payable and bond investment are misstated in the balance sheet accounts and interest income and interest expense are misstated in the income statement accounts. There is also a premium or discount account to be eliminated when the bonds are not issued at par value. Unless interest is paid at year-end, there is likely to be some amount of interest receivable and interest payable to be eliminated as well. Q8-4 Both the bond investment and interest income reported by the purchaser will be improperly included. Interest expense, bonds payable, and any premium or discount recorded on the books of the debtor also will be improperly included. In addition, the constructive gain or loss on bond retirement will be omitted if no eliminating entries are recorded in connection with the purchase. Q8-5 If the focus is placed on the legal entity, only bonds actually reacquired by the debtor will be treated as retired. This treatment can lead to incorrect reports for the consolidated entity in two dimensions. If a company were to repurchase bonds from an affiliate, any retirement gain or loss reported by the debtor is not a gain or loss to the economic entity and must be eliminated in preparing consolidated statements. Moreover, although a purchase of debt of any of the other companies in the consolidated entity will not be recognized as a retirement by the debtor, when emphasis is placed on the economic entity the purchase must serve as a basis for recognition of a bond retirement for the consolidated entity. Q8-6 The difference in treatment is due to the effect of the transactions on the consolidated entity. In the case of land sold to another affiliate, a gain has been recorded that is not a gain from the viewpoint of the consolidated entity. Thus, it must be eliminated in the consolidation process. On the other hand, in a bond repurchase the buyer simply records an investment in bonds and the debtor makes no special entries because of the purchase by an affiliate. Neither company records the effect of the transaction on the economic entity. Thus, in the consolidation process an entry must be made to show the gain on bond retirement that has occurred from the viewpoint of the economic entity. 8-1
  2. 2. Chapter 08 - Intercompany Indebtedness Q8-7 When there has been a direct sale to an affiliate, the interest income recorded by the purchaser should equal the interest expense recorded by the seller and the two items should have no net effect on reported income. The eliminating entries do not change consolidated net income in this case, but they will result in a more appropriate statement of the relevant income and expense categories in the consolidated income statement. Q8-8 Whenever a loss on bond retirement has been reported in a prior period, the affiliate that purchased the bonds paid more than the book value of the debt shown by the debtor. As a result, each period the interest income recorded by the buyer will be less than the interest expense reported by the debtor. When the two income statement accounts are eliminated in the consolidation process, the effect will be to increase consolidated net income. Because the full amount of the loss was recognized for consolidated purposes in the year in which the bonds were purchased by the affiliate, the effect of the elimination process in each of the periods that follow should be to increase consolidated income. Q8-9 The difference between the carrying value of the debt on the debtor's books and the carrying value of the investment on the purchaser's books indicates the amount of unrecognized gain or loss at the end of the period. To determine the amount of the gain or loss on retirement at the start of the period, the difference between interest income recorded by the purchaser on the bond that has been purchased and interest expense recorded by the debtor during the period is added to the difference between carrying values at the end of the period. Q8-10 Interest income and interest expense must be eliminated and a loss on bond retirement established in the elimination process. Consolidated net income will decrease by the amount of the loss. Because the loss is attributed to the subsidiary, income assigned to the controlling and noncontrolling interests will decrease in proportion to their share of common stock held. Q8-11 A constructive gain will be included in the consolidated income statement in this case and both consolidated net income and income to the controlling interest will increase by the full amount of the gain. Q8-12 A direct placement of subsidiary bonds with the parent should have no effect on consolidated income or on income assigned to the noncontrolling shareholders. Q8-13 When subsidiary bonds are purchased from a nonaffiliate by the parent and there is a constructive gain or loss for consolidated purposes, the gain or loss is assigned to the subsidiary and included in computing income to the noncontrolling shareholders. Q8-14 Interest income recorded by the subsidiary and interest expense recorded by the parent should be equal in the direct placement case. When the subsidiary purchases parent company bonds from a nonaffiliate, interest income and interest expense will not be the same unless the bonds are purchased from the nonaffiliate at an amount equal to the liability reported by the parent. 8-2
  3. 3. Chapter 08 - Intercompany Indebtedness Q8-15 A gain on constructive bond retirement recorded in a prior period means the bonds were purchased for less than book value and the interest income recorded by the subsidiary each period will be greater than the interest expense recorded by the parent. Consolidated net income for the current period will decrease by the difference between interest income and interest expense as these amounts are eliminated in preparing the consolidated statements. Income to the noncontrolling interest will be unaffected since the constructive gain is assigned to parent company. Q8-16 A constructive loss recorded on the subsidiary's bonds in a prior period means the interest income recorded by the parent is less than the interest expense recorded by the subsidiary in each of the following periods. Consolidated net income will increase when interest income and expense are eliminated. Income assigned to the noncontrolling interest will be based on the reported net income of the subsidiary plus the difference between interest income and interest expense each period following the retirement. As a result, the amount assigned will be greater than if the bond had not been constructively retired. Q8-17 On the date the parent sells the bonds to a nonaffiliate they are issued for the first time from a consolidated perspective. While the parent will record a gain or loss on sale of the bonds on its books, none is recognized from a consolidated viewpoint. The difference between the sale price received by the parent and par value is a premium or discount. Each period there will be a need to establish the correct amount for the premium or discount account and to adjust interest expense recorded by the subsidiary to bring the reported amounts into conformity with the sale price to the nonaffiliate. Q8-18 The retirement gain or loss reported by the subsidiary when it repurchases the bonds held by the parent must be eliminated in the consolidation process. From the viewpoint of the consolidated entity the bonds were retired at the point they were purchased by the parent and a gain or loss should have been recognized at that point. 8-3
  4. 4. Chapter 08 - Intercompany Indebtedness SOLUTIONS TO CASES C8-1 Recognition of Retirement Gains and Losses a. When Flood purchases the bonds it establishes an investment account on its books and Bradley establishes a bond liability and discount account on its books. No entry is made by Century. When Century purchases the bonds, Century records an investment and Flood removes the balance in the investment account and records a gain on the sale. Bradley makes no entry. When Bradley retires the issue, Bradley removes its liability and unamortized discount and records a loss on bond retirement. Century removes the bond investment account and records a loss on the sale of bonds. Flood makes no entry. b. A constructive loss on bond retirement is reported by the consolidated entity at the time Century purchases the bonds from Flood. The exact amount of the loss cannot be ascertained without knowing the maturity date of the bonds, the date of initial sale, and the date of purchase by Century. c. The initial sale of bonds by Bradley is treated as a normal transaction with no need for an adjustment to income assigned to the noncontrolling shareholders. Income assigned to noncontrolling shareholders will be reduced by a proportionate share of the loss reported in the consolidated income statement in the period in which Century purchases the bonds from Flood. In the years before the bonds are retired by Bradley, income assigned to the noncontrolling interest (assuming no differential) will be greater than a pro rata portion of the reported net income of Bradley. In the period in which the bonds are retired by Bradley, reported net income of Bradley must be adjusted to remove its loss on bond retirement before assigning income to the noncontrolling interest. No adjustment is made in the years following the repurchase by Bradley. 8-4
  5. 5. Chapter 08 - Intercompany Indebtedness C8-2 Borrowing by Variable Interest Entities MEMO To: President Hydro Corporation From: Re: , Accounting Staff Consolidation of Joint Venture Hydro Corporation and Rich Corner Bank established a joint venture which borrowed $30,000,000 and built a new production facility. That facility is now leased to Hydro on a 10year operating lease. Hydro currently reports the annual lease payment as an operating expense and in the notes to its financial statements must report a contingent liability for its guarantee of the debt of the joint venture. I have been asked to review the current financial reporting standards and determine whether Hydro’s current reporting is appropriate. The circumstances surrounding the creation of the joint venture and the lease arrangement with Hydro appear to point to the need for Hydro to consolidate the joint venture with its own operations. Although Rich Corner Bank holds 100 percent of the equity of the joint venture, it has contributed less than 1 percent of the total assets of the joint venture ($200,000 of equity versus $30,000,000 of total borrowings). Under normal circumstances, less than a 10 percent investment in the entity’s total assets is considered insufficient to permit the entity to finance its activities. [FASB INT. 46, Par 9] In this situation, Hydro has guaranteed the $30,000,000 borrowed by the joint venture and has guaranteed a 20 percent annual return on the equity investment of Rich Corner Bank. These conditions will result in Hydro Corporation absorbing any losses incurred by the joint venture and establish Hydro Corporation as the primary beneficiary of the entity. The FASB requires consolidation by the entity that will absorb a majority of the entity’s expected losses if they occur. [FASB INT. 46, Par. 14] Consolidation of the joint venture will result in including the production facility among Hydro’s assets and the debt as part of its long-term liabilities. The claim on the net assets of the joint venture held by Rich Corner Bank will be reported as part of noncontrolling interest. Hydro’s consolidated income statement will not include the lease payment as an operating expense, but will include depreciation expense on the production facility and interest expense for the interest payment made on the borrowing of the joint venture. Primary citation: FASB INT. 46 8-5
  6. 6. Chapter 08 - Intercompany Indebtedness Case 8-3 Subsidiary Bond Holdings MEMO To: Financial Vice-President Farflung Corporation From: Re: , Accounting Staff Investment in Bonds Issued by Subsidiary The consolidated financial statements of Farflung Corporation should include both Micro Company and Eagle Corporation. The purpose of the consolidated statements is to present the financial position and results of operations for a parent and one or more subsidiaries as if the individual entities actually were a single company or entity. [ARB 51, Par. 1] When one subsidiary purchases the bonds of another, the investment reported by the purchasing affiliate and the liability reported by the debtor must be eliminated and a gain or loss reported on the difference between the purchase price and the carrying value of the debt at the time of purchase. In preparing Farflung’s consolidated statements at December 31, 20X4, the following eliminating entry should have been included in the workpaper: E(1) Bonds Payable Loss on Bond Retirement Investment in Micro Company Bonds 400,000 24,000 424,000 The $24,000 loss should have been included in the consolidated income statement, leading to a reduction of $15,600 ($24,000 x .65) in income assigned to the controlling interest and a reduction of $8,400 ($24,000 x .35) in income assigned to noncontrolling shareholders. This error should be corrected by restating the financial statements of the consolidated entity for 20X4. While omission of the eliminating entry resulted in incorrect financial statements for the consolidated entity, it should have no impact on the financial statements of the individual subsidiaries. Assuming (1) the bonds had 15 years remaining until maturity when purchased by Eagle and pay 8 percent interest annually, (2) straight-line amortization of the premium paid by Eagle is appropriate, and (3) the consolidated financial statements as of December 31, 20X4, are corrected, the eliminating entry at December 31, 20X5, is: 8-6
  7. 7. Chapter 08 - Intercompany Indebtedness C8-3 (continued) E(2) Bonds Payable Interest Income Retained Earnings Noncontrolling Interest Investment in Micro Company Bonds Interest Expense 400,000 30,400(a) 15,600 8,400 422,400(b) 32,000(c) (a) ($400,000 x .08) - ($24,000/15 years) (b) $424,000 - ($24,000/15 years) (c) $400,000 x .08 Primary citation: ARB 51, Par. 6 C8-4 Interest Income and Expense a. Snerd apparently paid more than par value for the bonds and is amortizing the premium against interest income over the life of the bonds. Thus, the cash received is greater than the amount of interest income recorded. b. With the information given, the following appears to be true: (1) When purchasing the bonds, Snerd apparently paid less than the current carrying amount of the bonds on the subsidiary’s books because a constructive gain on bond retirement is included in the 20X3 consolidated income statement. Since Snerd paid par value for the bonds, they must have been sold at a premium by the subsidiary. (2) Because the bonds were sold at a premium, interest expense recorded by the subsidiary will be less than the annual interest payment made to the parent. (3) Interest income recorded each period by Snerd will exceed interest expense recorded by the subsidiary. When the two balances are eliminated, the effect will be to reduce income to both the controlling and noncontrolling shareholders. 8-7
  8. 8. Chapter 08 - Intercompany Indebtedness C8-5 Intercompany Debt Answers to this case can be found in the SEC Form 10-K filed by Hershey Foods and its annual report. a. When intercompany loans are made between affiliates in different countries, the problem of changing currency exchange rates may arise, especially if any of the loans are denominated in a currency that rapidly changes in value against the dollar. Hershey Foods and many other companies in the same situation hedge their intercompany receivables/payables through foreign currency forward contracts and swaps. b. Hershey's intercompany receivables/payables intercompany purchases and sales of goods. 8-8 appear to come primarily from
  9. 9. Chapter 08 - Intercompany Indebtedness SOLUTIONS TO EXERCISES E8-1 Bond Sale from Parent to Subsidiary a. Journal entries recorded by Humbolt Corporation: January 1, 20X2 Investment in Lamar Corporation Bonds Cash July 1, 20X2 Cash Interest Income Investment in Lamar Corporation Bonds 156,000 4,500 156,000 4,200 300 December 31, 20X2 Interest Receivable Interest Income Investment in Lamar Corporation Bonds b. 4,500 Journal entries recorded by Lamar Corporation: January 1, 20X2 Cash Bonds Payable Bond Premium 156,000 July 1, 20X2 Interest Expense Bond Premium Cash 4,200 300 December 31, 20X2 Interest Expense Bond Premium Interest Payable 4,200 300 c. 4,200 300 150,000 6,000 4,500 4,500 Eliminating entries, December 31, 20X2: E(1) E(2) Bonds payable Premium on Bonds Payable Interest income Investment in Lamar Corporation Bonds Interest expense Eliminate intercorporate bond holdings. Interest payable Interest receivable Eliminate intercompany receivable/payable. 8-9 150,000 5,400 8,400 4,500 155,400 8,400 4,500
  10. 10. Chapter 08 - Intercompany Indebtedness E8-2 Computation of Transfer Price a. $105,000 = $100,000 par value + ($250 x 20 periods) premium b. $103,500 = $105,000 - ($250 x 6 periods) c. Eliminating entries: E(1) E(2) Bonds Payable Bond Premium Interest Income Investment in Nettle Corporation Bonds Interest Expense Interest Payable Interest Receivable 100,000 3,500 11,500 6,000 103,500 11,500 6,000 E8-3 Bond Sale at Discount a. $16,800 = [($600,000 x .08) + ($12,000 / 5 years)] x 1/3 b. Journal entries recorded by Wood Corporation: January 1, 20X4 Cash Interest Receivable 16,000 July 1, 20X4 Cash Investment in Carter Company Bonds Interest Income $800 = ($400,000 - $392,000)/(5 x 2) December 31, 20X4 Interest Receivable Investment in Carter Company Bonds Interest Income c. 16,000 800 16,000 800 16,000 16,800 16,800 Eliminating entries, December 31, 20X4: E(1) E(2) Bonds Payable Interest Income Investment in Carter Company Bonds Bond Discount Interest Expense $33,600 = $16,000 + $16,000 + $800 + $800 $395,200 = $392,000 + ($800 x 4) $4,800 = $8,000 - ($800 x 4) Interest Payable Interest Receivable 400,000 33,600 16,000 8-10 395,200 4,800 33,600 16,000
  11. 11. Chapter 08 - Intercompany Indebtedness E8-4 Evaluation of Intercorporate Bond Holdings a. The bonds were originally sold at a discount. Stellar purchased the bonds at par value and a constructive loss was reported. b. The annual interest payment received by Stellar will be less than the interest expense recorded by the subsidiary. When bonds are sold at a discount, the issue price of the bonds is adjusted downward because the annual interest payment is less than is needed to issue the bonds at par value. c. In 20X6, consolidated net income was decreased as a result of the loss on constructive retirement of bonds. Each period following the purchase, the amount of interest expense recorded by the subsidiary will exceed the interest income recorded by the parent. When these two amounts are eliminated, consolidated net income will be increased. Thus, consolidated net income for 20X7 will be increased. E8-5 Multiple-Choice Questions 1. a A constructive gain of $100,000 is included in consolidated net income for the period ended March 31, 20X8, and consolidated retained earnings at March 31, 20X8. Because the bonds of the parent are constructively retired, there is no effect on the amounts assigned to the noncontrolling interest. [AICPA Adapted] 2. a The loss on bond retirement will result in a reduction in consolidated retained earnings. [AICPA Adapted] 3. b $4,700 = ($50,000 x .10) - ($3,000 / 10 years) 4. a $4,000 = ($50,000 x .10) - ($8,000 / 8 years) 5. c $5,600 loss = $58,000 purchase price - [$53,000 - ($3,000 / 10 years) x 2 years] 6. c Operating income of Kruse Corporation Net income of Gary's Ice Cream Parlors Less: Loss on bond retirement Recognition during 20X6 ($4,700 - $4,000) Consolidated net income $40,000 20,000 $60,000 (5,600) 700 $55,100 8-11
  12. 12. Chapter 08 - Intercompany Indebtedness E8-6 Multiple-Choice Questions 1. a $14,000 = [($300,000 x .09) - ($60,000 / 10 years)] x ($200,000 / $300,000) 2. c $12,000 = [$120,000 - ($20,000 / 10 years) x 2 years] - $104,000 3. b Net income of Solar Corporation Unrecognized portion of gain on bond retirement ($12,000 - $1,500) Proportion of stock held by noncontrolling interest Income to noncontrolling interest $30,000 10,500 $40,500 x .20 $ 8,100 E8-7 Constructive Retirement at End of Year a. Eliminating entries, December 31, 20X5: E(1) E(2) b. Bonds Payable Premium on Bonds Payable Investment in Able Company Bonds Gain on Bond Retirement $9,000 = [($400,000 x 1.03) - $400,000] x 15/20 $12,000 = $9,000 + $400,000 - $397,000 Interest Payable Interest Receivable 400,000 9,000 18,000 397,000 12,000 18,000 Eliminating entries, December 31, 20X6: E(1) E(2) Bonds Payable Premium on Bonds Payable Interest Income Investment in Able Company Bonds Interest Expense Retained Earnings, January 1 Noncontrolling Interests $8,400 = $9,000 - [$9,000 / (15 x 2)] x 2 $36,200 = $36,000 + [$3,000 / (15 x 2)] x 2 $397,200 = $397,000 + ($100 x 2) $35,400 = $36,000 - ($300 x 2) $7,200 = $12,000 x .60 $4,800 = $12,000 x .40 Interest Payable Interest Receivable 400,000 8,400 36,200 18,000 8-12 397,200 35,400 7,200 4,800 18,000
  13. 13. Chapter 08 - Intercompany Indebtedness E8-8 Constructive Retirement at Beginning of Year a. Eliminating entries, December 31, 20X5: E(1) E(2) b. Bonds Payable Premium on Bonds Payable Interest Income Investment in Able Company Bonds Interest Expense Gain on Bond Retirement $9,000 = [($400,000 x 1.03) - $400,000] x 15/20 $36,200 = $36,000 + [($400,000 - $396,800)/(16 x 2)] x 2 $397,000 = $396,800 + ($100 x 2) $35,400 = $36,000 - ($300 x 2) $12,800 = [($400,000 x 1.03) - $400,000] x 16/20 + ($400,000 - $396,800) Interest Payable Interest Receivable 400,000 9,000 36,200 18,000 397,000 35,400 12,800 18,000 Eliminating entries, December 31, 20X6: E(1) E(2) Bonds Payable Premium on Bonds Payable Interest Income Investment in Able Company Bonds Interest Expense Retained Earnings, January 1 Noncontrolling Interests Interest Payable Interest Receivable 400,000 8,400 36,200 18,000 8-13 397,200 35,400 7,200 4,800 18,000
  14. 14. Chapter 08 - Intercompany Indebtedness E8-9 Retirement of Bonds Sold at a Discount Elimination of bond investment at December 31, 20X8: Bonds Payable 300,000 Interest Income 21,240 Loss on Constructive Bond Retirement 2,730 Investment in Farley Corporation Bonds Interest Expense Discount on Bonds Payable Eliminate intercorporate bond holdings: $21,240 = $21,000 + [($300,000 - $296,880) / 13 years] $2,730 = $296,880 - $294,150 (computed below) $297,120 = $296,880 + [($300,000 - $296,880) / 13 years] $21,450 = $21,000 + ($9,000 / 20 years) $5,400 = ($9,000 / 20 years) x 12 years 297,120 21,450 5,400 Computation of book value of liability at constructive retirement Sale price of bonds ($300,000 x .97) Amortization of discount [($300,000 - $291,0000) / 20 years] x 7 years Book value of liability at January 1, 20X8 $291,000 3,150 $294,150 E8-10 Loss on Constructive Retirement Eliminating entries, December 31, 20X8: E(1) E(2) Bonds Payable Interest Income Loss on Bond Retirement Investment in Apple Corporation Bonds Discount on Bonds Payable Interest Expense Interest Payable Interest Receivable 100,000 8,000 12,000 5,000 8-14 106,000 3,000 11,000 5,000
  15. 15. Chapter 08 - Intercompany Indebtedness E8-11 Determining the Amount of Retirement Gain or Loss a. Par value of bonds outstanding Annual interest rate Interest payment Amortization of bond premium ($15,000 x 2 bonds) / 5 years Interest charge for full year Less: Interest on bond purchased by Online Enterprises [($18,000 x 1/2) x (4 months / 12 months)] Interest expense included in consolidated income statement $200,000 x .12 $ 24,000 b. Sale price of bonds, January 1, 20X1 Amortization of premium [($15,000 / 5) x 2 2/3 years] Book value at time of purchase Purchase price Gain on bond retirement $115,000 (8,000) $107,000 (100,000) $ 7,000 c. Eliminating entries, December 31, 20X3: E(1) E(2) Bonds Payable Bond Premium Interest Income Investment in Downlink Bonds Interest Expense Gain on Bond Retirement (6,000) $ 18,000 (3,000) $ 15,000 100,000 6,000 4,000 Interest Payable Interest Receivable 6,000 8-15 100,000 3,000 7,000 6,000
  16. 16. Chapter 08 - Intercompany Indebtedness E8-12 Evaluation of Bond Retirement a. No gain or loss will be reported by Bundle. b. A gain of $13,000 will be reported: Book value of liability reported by Bundle: Par value of bonds outstanding Unamortized premium $8,000 - [($8,000 / 10 years) x 3.5 years] Book value of debt Amount paid by Parent Gain on bond retirement c. 5,200 $205,200 (192,200) $ 13,000 Consolidated net income for 20X6 will increase by $12,000: Gain on bond retirement Adjustment for excess of interest income over interest expense: Interest income Interest expense Increase in consolidated net income d. $200,000 $ 13,000 $(11,600) 10,600 (1,000) $ 12,000 Eliminating entries, December 31, 20X6: E(1) E(2) Bonds Payable Premium on Bonds Payable Interest Income Investment in Bundle Company Bonds Interest Expense Gain on Bond Retirement Eliminate intercorporate bond holdings: $4,800 = ($8,000 / 10 years) x 6 years $11,600 = [$22,000 + ($7,800 / 6.5 years)] / 2 $192,800 = $192,200 + [($7,800 / 6.5 years) / 2] $10,600 = ($22,000 - $800) / 2 Interest Payable Interest Receivable Eliminate intercompany receivable/payable. 8-16 200,000 4,800 11,600 11,000 192,800 10,600 13,000 11,000
  17. 17. Chapter 08 - Intercompany Indebtedness E8-12 (continued) e. Eliminating entries, December 31, 20X7: E(1) E(2) f. Bonds Payable Premium on Bonds Payable Interest Income Investment in Bundle Company Bonds Interest Expense Retained Earnings, January 1 Noncontrolling Interest Eliminate intercorporate bond holdings: $4,000 = ($8,000 / 10 years) x 5 years $23,200 = $22,000 + ($7,800 / 6.5 years) $194,000 = $192,800 + ($7,800 / 6.5 years) $21,200 = $22,000 - ($8,000 / 10 years) $8,400 = ($13,000 - $1,000) x .70 $3,600 = ($13,000 - $1,000) x .30 200,000 4,000 23,200 Interest Payable Interest Receivable Eliminate intercompany receivable/payable. 11,000 194,000 21,200 8,400 3,600 11,000 Income assigned to noncontrolling interest in 20X7 is $14,400: Net income reported by Bundle Adjustment for excess of interest income over interest expense: Interest income Interest expense Realized net income Proportion of ownership held Income assigned to noncontrolling interest $ 50,000 $(23,200) 21,200 8-17 (2,000) $ 48,000 x .30 $ 14,400
  18. 18. Chapter 08 - Intercompany Indebtedness E8-13 Elimination of Intercorporate Bond Holdings a. Eliminating entries, December 31, 20X8: E(1) E(2) b. Bonds Payable Premium on Bonds Payable Interest Income Constructive Loss on Bond Retirement Investment in Stang Corporation Bonds Interest Expense Eliminate intercorporate bond holdings: $3,000 = $5,000 - ($500 x 4 years) $11,300 = $12,000 - ($4,900 / 7 years) $1,400 = $104,900 - ($105,000 - $1,500) $104,200 = $104,900 - ($4,900 / 7 years) $11,500 = $12,000 - ($5,000 / 10 years) Interest Payable Interest Receivable Eliminate intercompany receivable/payable. 6,000 104,200 11,500 6,000 Income assigned to noncontrolling interest in 20X8 is $6,580: Net income reported by Stang Corporation Constructive loss on bond retirement Adjustment for excess of interest expense over interest income: Interest expense Interest income Realized net income Proportion of ownership held Income assigned to noncontrolling interest c. 100,000 3,000 11,300 1,400 $ 20,000 (1,400) $11,500 (11,300) 200 $ 18,800 x .35 $ 6,580 Eliminating entries, December 31, 20X9: E(1) E(2) Bonds Payable Premium on Bonds Payable Interest Income Retained Earnings, January 1 Noncontrolling Interest Investment in Stang Corporation Bonds Interest Expense Eliminate intercorporate bond holdings: $2,500 = $3,000 - $500 $11,300 = $12,000 - ($4,900 / 7 years) $780 = ($1,400 - $200) x .65 $420 = ($1,400 - $200) x .35 $103,500 = $104,200 - $700 $11,500 = $12,000 - ($5,000 / 10 years) Interest Payable Interest Receivable Eliminate intercompany receivable/payable. 8-18 100,000 2,500 11,300 780 420 6,000 103,500 11,500 6,000
  19. 19. Chapter 08 - Intercompany Indebtedness SOLUTIONS TO PROBLEMS P8-14 Consolidation Workpaper with Sale of Bonds to Subsidiary a. Entries recorded by Porter on its investment in Temple: Cash Investment in Temple Corporation Stock Record dividends from Temple: $10,000 x .60 Investment in Temple Corporation Stock Income from Subsidiary Record equity-method income: $30,000 x .60 b. 18,000 6,000 18,000 Entry recorded by Porter on its bonds payable: Interest Expense Bond Premium Cash Record interest payment: $400 = ($82,000 - $80,000) / 5 years c. 6,000 6,000 400 6,400 Entry recorded by Temple on bond investment: Cash Interest Income Investment in Porter Company Bonds 8-19 6,400 6,000 400
  20. 20. Chapter 08 - Intercompany Indebtedness P8-14 (continued) d. Eliminating entries, December 31, 20X2: E(1) Income from Subsidiary Dividends Declared Investment in Temple Corporation Stock Eliminate income from subsidiary. 18,000 E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $12,000 = $30,000 x .40 12,000 E(3) Common Stock — Temple Corporation Retained Earnings, January 1 Investment in Temple Corporation Stock Noncontrolling Interest Eliminate beginning investment balance: $90,000 = $102,000 - $12,000 $60,000 = ($100,000 + $50,000) x .40 E(4) Bonds payable Premium on Bonds Payable Interest income Investment in Porter Company Bonds Interest expense Eliminate intercorporate bond holdings: $1,200 = ($82,000 - $80,000) x 3/5 $81,200 = ($82,000 - $800) 8-20 100,000 50,000 80,000 1,200 6,000 6,000 12,000 4,000 8,000 90,000 60,000 81,200 6,000
  21. 21. Chapter 08 - Intercompany Indebtedness P8-14 (continued) e. Porter Company and Temple Corporation Consolidation Workpaper December 31, 20X2 Item Sales Interest Income Income from Subsidiary Credits Cost of Goods Sold Depreciation Expense Interest Expense Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward Porter Co. 200,000 18,000 218,000 99,800 25,000 6,000 (130,800) Temple Corp. 114,000 6,000 120,000 61,000 15,000 14,000 (90,000) 50,000 30,000 80,000 (10,000) (3) 50,000 36,000 6,000 277,200 70,000 86,000 80,200 120,000 500,000 40,000 65,000 300,000 Dividends Declared 230,000 87,200 317,200 (40,000) Retained Earnings, Dec. 31, carry forward Investment in Porter Company Bonds Debits (4) 6,000 6,000 30,000 Cash and Accounts Receivable Inventory Buildings and Equipment Investment in Temple Corporation Stock (4) 6,000 (1) 18,000 (2) 12,000 36,000 87,200 Retained Earnings, Jan. 1 Income, from above Eliminations Debit Credit (1) 6,000 (2) 4,000 Accum. Depreciation Accounts Payable Bonds Payable Bond Premium Common Stock Porter Company Temple Corporation Retained Earnings, from above Noncontrolling Interest 175,000 68,800 80,000 1,200 Credits 802,200 200,000 277,200 314,000 160,800 40,000 14,000 (214,800) 99,200 (12,000) 87,200 230,000 87,200 317,200 (40,000) 277,200 120,200 185,000 800,000 102,000 802,200 16,000 Consolidated 314,000 (1) 12,000 (3) 90,000 81,200 486,200 75,000 41,200 200,000 (4) 81,200 1,105,200 250,000 110,000 200,000 (4) 80,000 (4) 1,200 200,000 100,000 (3)100,000 70,000 86,000 16,000 277,200 267,200 (2) 8,000 (3) 60 000 267,200 68,000 1,105,200 486,200 8-21
  22. 22. Chapter 08 - Intercompany Indebtedness P8-15 Consolidation Workpaper with Sale of Bonds to Parent a. Entries recorded by Mega Corporation on its investment in Tarp Company: Cash Investment in Tarp Company Stock Record dividends from Temple: $20,000 x .90 Investment in Tarp Company Stock Income from Subsidiary Record equity-method income: $25,000 x .90 b. 18,000 22,500 22,500 Entry recorded by Mega Corporation on its investment in Tarp Company bonds: Cash Interest Income Investment in Tarp Company Bonds Record interest payment: $800 = ($104,000 - $100,000) / 5 years c. 18,000 6,000 5,200 800 Entry recorded by Tarp Company on its bonds payable: Interest Expense Bond Premium Cash 5,200 800 8-22 6,000
  23. 23. Chapter 08 - Intercompany Indebtedness P8-15 (continued) d. Eliminating entries, December 31, 20X4: E(1) Income from Subsidiary Dividends Declared Investment in Tarp Company Stock Eliminate income from subsidiary. E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $2,500 = $25,000 x .10 2,500 E(3) Common Stock — Tarp Company Retained Earnings, January 1 Investment in Tarp Company Stock Noncontrolling Interest Eliminate beginning investment balance: $117,000 = $121,500 - $4,500 $13,000 = ($80,000 + $50,000) x .10 80,000 50,000 Bonds Payable Premium on Bonds Payable Interest Income Investment in Tarp Company Bonds Interest Expense Eliminate intercorporate bond holdings: $1,600 = $4,000 x 2/5 $101,600 = $104,000 - ($4,000 x 3/5) 100,000 1,600 5,200 E(4) 8-23 22,500 18,000 4,500 2,000 500 117,000 13,000 101,600 5,200
  24. 24. Chapter 08 - Intercompany Indebtedness P8-15 (continued) Mega Corporation and Tarp Company Consolidation Workpaper December 31, 20X4 e. Item Sales Interest Income Income from Subsidiary Credits Cost of Goods Sold Depreciation Expense Interest Expense Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward Mega Tarp Corp. Co. 140,000 125,000 5,200 22,500 167,700 125,000 86,000 79,800 20,000 15,000 16,000 5,200 (122,000) (100,000) (3) 50,000 30,200 5,200 257,700 55,000 80,200 22,000 165,000 400,000 36,600 75,000 240,000 Dividends Declared Retained Earnings, Dec. 31, carry forward (2) 5,200 50,000 25,000 75,000 (20,000) 242,000 45,700 287,700 (30,000) Investment in Tarp Company Bonds Debits (4) 5,200 25,000 Cash and Receivables Inventory Buildings and Equipment Investment in Tarp Company Stock (4) 5,200 (1) 22,500 2,500 30,200 45,700 Retained Earnings, Jan. 1 Income, from above Eliminations Debit Credit (1) 18,000 (2) 2,000 Accum. Depreciation Current Payables Bonds Payable Bond Premium Common Stock Mega Corporation Tarp Company Retained Earnings, from above Noncontrolling Interest 140,000 92,400 200,000 Credits 810,100 120,000 257,700 265,000 165,800 35,000 16,000 (216,800) 48,200 (2,500) 45,700 242,000 45,700 287,700 (30,000) 257,700 58,600 240,000 640,000 121,500 101,600 810,100 25,200 Consolidated 265,000 (1) 4,500 (3)117,000 (4)101,600 351,600 938,600 80,000 35,000 100,000 1,600 (4)100,000 (4) 1,600 80,000 (3) 80,000 55,000 80,200 25,200 257,700 261,800 (2) 500 (3) 13,000 261,800 13,500 938,600 351,600 8-24 220,000 127,400 200,000 120,000
  25. 25. Chapter 08 - Intercompany Indebtedness P8-16 Direct Sale of Bonds to Parent a. Journal entries recorded by Fern Corporation: January 1, 20X3 Cash Interest Receivable Receive interest on bond investment. July 1, 20X3 Cash Investment in Vincent Company Bonds Interest Income Record receipt of bond interest: $250 = $5,000 / (10 years x 2) December 31, 20X3 Cash Investment in Vincent Company Stock Record dividends for Vincent: $7,000 = $10,000 x .70 Interest Receivable (Current Receivables) Investment in Vincent Company Bonds Interest Income Accrue interest income at year-end. Investment in Vincent Company Stock Income from Subsidiary Record equity-method income: $21,000 = $30,000 x .70 Income from Subsidiary Investment in Vincent Company Stock Record amortization of differential: $2,800 = ($56,000 / 14 years) x .70 b. 2,000 2,000 250 7,000 2,000 250 21,000 2,800 2,000 2,250 7,000 2,250 21,000 2,800 Journal entries recorded by Vincent Company: January 1, 20X3 Interest Payable Cash Record interest payment: $4,000 = $100,000 x (.08 / 2) 4,000 July 1, 20X3 Interest Expense Discount on Bonds Payable Cash Semiannual payment of interest: $500 = $10,000 / 20 semiannual payments 8-25 4,500 4,000 500 4,000
  26. 26. Chapter 08 - Intercompany Indebtedness P8-16 (continued) December 31, 20X3 Interest Expense Discount on Bonds Payable Interest Payable (Current Liabilities) Accrue interest expense at year-end. c. 4,500 500 4,000 Elimination entries, December 31, 20X3: E(1) Income from Subsidiary Dividends Declared Investment in Vincent Company Stock Eliminate income from subsidiary. E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $7,800 = [$30,000 – ($56,000 / 14 years)] x .30 7,800 E(3) Common Stock — Vincent Company Retained Earnings, January 1 Differential Investment in Vincent Company Stock Noncontrolling Interest Eliminate beginning investment balance: $48,000 = $56,000 - ($4,000 x 2 years) $138,600 = .70($50,000 + $100,000 + $48,000) $59,400 = .30($50,000 + $100,000 + $48,000) 50,000 100,000 48,000 E(4) E(5) 18,200 Land, Buildings and Equipment (net) Operating Expenses Differential Assign differential and record amortization: $44,000 = $56,000 – ($4,000 x 3 years) 44,000 4,000 Bonds Payable Interest Income Investment in Vincent Company Bonds Interest Expense Discount on Bonds Payable Eliminate intercorporate bond holdings: $46,500 = $45,000 + ($250 x 6 periods) $3,500 = $7,000 / 2 50,000 4,500 E(6) Interest Payable (Current Liabilities) Interest Receivable (Current Receivables) Eliminate intercompany receivable/payable. 2,000 E(7) Retained Earnings, January 1 Noncontrolling Interest Land, Buildings and Equipment (net) Eliminate profit on intercompany sale of land. 5,600 2,400 8-26 7,000 11,200 3,000 4,800 138,600 59,400 48,000 46,500 4,500 3,500 2,000 8,000
  27. 27. Chapter 08 - Intercompany Indebtedness P8-16 (continued) Fern Corporation and Vincent Company Consolidation Workpaper December 31, 20X3 d. Item Sales Interest Income Income from Subsidiary Credits Operating Expenses Interest Expense Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward Fern Corp. Vincent Company 300,000 200,000 4,500 18,200 322,700 200,000 198,500 161,000 27,000 9,000 (225,500) (170,000) 97,200 30,000 Retained Earnings, Jan. 1 244,400 100,000 Income, from above Dividends Declared 97,200 341,600 (60,000) 30,000 130,000 (10,000) Ret. Earnings, Dec. 31, carry forward 281,600 120,000 30,300 170,000 180,000 Cash and Current Receivables Inventory Land, Buildings and Equipment (net) Discount on Bonds Payable Investment in Vincent Company Bonds Investment in Vincent Company Stock Differential Debits Consolidated 500,000 (5) 4,500 (1) 18,200 (4) 4,000 (2) 7,800 34,500 4,500 (3)100,000 (7) 5,600 34,500 4,500 46,000 70,000 320,000 Eliminations Debit Credit (5) (1) (2) 140,100 4,500 7,000 3,000 500,000 363,500 31,500 (395,000) 105,000 (7,800) 97,200 238,800 97,200 336,000 (60,000) 2,000 74,300 240,000 (7) 8,000 536,000 (5) 7,000 276,000 (6) (4) 44,000 14,500 3,500 3,500 46,500 (5) 46,500 149,800 (1) 11,200 (3)138,600 (4) 48,000 (3) 48,000 716,600 303,000 Current Liabilities Bonds Payable Common Stock Retained Earnings, from above Noncontrolling Interest 35,000 300,000 100,000 33,000 100,000 50,000 (6) 2,000 (5) 50,000 (3) 50,000 281,600 120,000 140,100 (7) 2,400 Credits 716,600 303,000 336,500 8-27 853,800 66,000 350,000 100,000 14,500 (2) 4,800 (3) 59,400 336,500 276,000 61,800 853,800
  28. 28. Chapter 08 - Intercompany Indebtedness P8-17 Information Provided in Eliminating Entry a. Rupp Corporation is the parent company. In the eliminating entry, noncontrolling interest is credited with a portion of the constructive gain on bond retirement. b. Rupp holds 75 percent ownership of Gross [$4,200 / ($4,200 + $1,400)]. c. Amount paid to acquire bonds: Investment in Gross bonds, December 31, 20X7 Amortization of discount following purchase [($200,000 - $198,200) / 3 years] x 2.5 years Purchase price paid by Rupp d. $198,200 (1,500) $196,700 A gain of $7,700 was reported: Book value of liability reported by Gross: Par value of bonds outstanding Unamortized premium $8,000 - [($8,000 / 10 years) x 4.5 years] Book value of debt Purchase price paid by Rupp Gain on bond retirement e. $200,000 4,400 $204,400 (196,700) $ 7,700 Consolidated net income for 20X7 after adjustment for bond retirement: Amount reported without adjustment Adjustment for excess of interest income over interest expense: Interest income Income expense $ 70,000 $(18,600) 17,200 Consolidated net income f. Income assigned to the noncontrolling interest will decrease by $350 ($1,400 x .25) as a result of the eliminating entry. g. (1,400) $ 68,600 Eliminating entry prepared at December 31, 20X8: Bonds Payable Premium on Bonds Payable Interest Income Investment in Gross Corporation Bonds Interest Expense Retained Earnings, January 1 Noncontrolling Interest Eliminate intercompany bond holdings: $1,600 = ($2,400 / 3 years) x 2 years $18,600 = ($200,000 x .09) + ($1,800 / 3 years) $198,800 = $198,200 + ($1,800 / 3 years) $17,200 = ($200,000 x .09) - ($2,400 / 3 years) $3,150 = [$7,700 - ($1,400 x 2.5 years)] x .75 $1,050 = [$7,700 - ($1,400 x 2.5 years)] x .25 8-28 200,000 1,600 18,600 198,800 17,200 3,150 1,050
  29. 29. Chapter 08 - Intercompany Indebtedness P8-18 Prior Retirement of Bonds a. Amount paid by Amazing Corporation for bonds: Reported balance, December 31, 20X6 Amortization of premium during 20X6 ($2,400 / 6 years) Purchase price $102,400 400 $102,800 b. Interest Expense Discount on Bonds Payable Cash Annual payment of interest: $9,500 = [$9,000 + ($3,000 / 6 years)] 9,500 c. Cash Investment in Broadway Company Bonds Interest Income Annual receipt of interest: $8,600 = [$9,000 - ($2,400 / 6 years)] 9,000 d. Bonds Payable Loss on Bond Retirement Investment in Broadway Company Bonds Discount on Bonds Payable Eliminate intercorporate bond holdings: $6,300 = $102,800 - [$97,000 ($3,000 / 6 years)] $102,800 = computed above $3,500 = [$3,000 + ($3,000 / 6 years)] 100,000 6,300 e. 500 9,000 400 8,600 102,800 3,500 Consolidated net Income and income to controlling interest for 20X5 and 20X6: Operating income reported by Amazing Net income reported by Broadway Loss on bond retirement Adjustment for excess of interest expense ($9,500) over interest income ($8,600) Consolidated net income Income to noncontrolling interest: ($60,000 - $6,300) x .15 ($80,000 + $900) x .15 Income to controlling interest 8-29 20X5 $120,000 60,000 (6,300) $173,700 (8,055) $165,645 20X6 $150,000 80,000 900 $230,900 (12,135) $218,765
  30. 30. Chapter 08 - Intercompany Indebtedness P8-19 Incomplete Data a. Purchase price of bonds: Balance reported in bond investment account in excess of par value, December 31, 20X4 ($109,000 - $100,000) Amount amortized per year ($9,000 / 6 years) Premium at date of purchase Par value Purchase price $ 9,000 1,500 $ 10,500 100,000 $110,500 b. Carrying amount of liability on date of purchase: Bond premium, December 31, 20X4 Amount amortized per year ($6,000 / 6 years) Bond premium, January 1, 20X4 Par value Carrying amount of liability, January 1, 20X4 $ 6,000 1,000 $ 7,000 100,000 $107,000 c. Income to noncontrolling interest in 20X5: Reported net income of Condor Company Adjustment for excess of interest expense over interest income recorded in 20X5 Proportion of stock held by noncontrolling interest Income assigned to noncontrolling interest Excess of interest expense over interest income Interest expense: ($100,000 x .12) - ($10,000 / 10) $11,000 Interest income: ($100,000 x .12) – ($10,500 / 7) (10,500) Excess $ 500 8-30 $ 30,000 500 $ 30,500 x .30 $ 9,150
  31. 31. Chapter 08 - Intercompany Indebtedness P8-20 Balance Sheet Eliminations a. Eliminating entries, December 31, 20X4: E(1) Common Stock — Stang Brewing Company Retained Earnings Investment in Stang Brewing Stock Noncontrolling Interest Eliminate balance in investment account. 100,000 170,000 E(2) Retained Earnings Inventory Eliminate unrealized inventory profit on downstream sale: $12,000 = $42,000 - ($42,000 / 1.40) 12,000 E(3) Retained Earnings Noncontrolling Interest Inventory Eliminate unrealized inventory profit on upstream sale: $6,000 = $26,000 - ($26,000 / 1.30) 4,800 1,200 E(4) Bonds Payable Bond Premium Investment in Stang Brewing Bonds Retained Earnings Noncontrolling Interest Unrecognized portion of gain at December 31, 20X4: Bond liability ($300,000 + $36,000) / 3 Bond investment Unrecognized portion of gain Proportion of stock held by Bath Corporation Gain assigned to Bath Corporation Gain assigned to noncontrolling interest (10,500 x .20) E(5) Interest Payable (Accounts Payable) Interest Receivable (Cash and Receivables) 8-31 100,000 12,000 216,000 54,000 12,000 6,000 101,500 8,400 2,100 $112,000 (101,500) $ 10,500 x $ .80 8,400 $ 2,100 4,000 4,000
  32. 32. Chapter 08 - Intercompany Indebtedness P8-20 (continued) b. Bath Corporation and Stang Brewing Company Consolidated Balance Sheet Workpaper December 31, 20X4 Stang Brewing Co. Item Bath Corp. Cash and Receivables Inventory 122,500 200,000 124,000 150,000 320,000 360,000 Buildings and Equipment (net) Investment in: Stang Brewing Bonds Stang Brewing Stock Total Debits Accounts Payable Bonds Payable Bond Premium Common Stock Retained Earnings 101,500 216,000 960,000 40,000 400,000 200,000 320,000 960,000 (5) 4,000 (2) 12,000 (3) 6,000 28,000 300,000 36,000 100,000 170,000 634,000 8-32 Consolidated 242,500 332,000 680,000 (4)101,500 (1)216,000 634,000 Noncontrolling Interest Total Credits Eliminations Debit Credit (5) 4,000 (4)100,000 (4) 12,000 (1)100,000 (1)170,000 (2) 12,000 (3) 4,800 (3) 1,200 404,000 (4) 8,400 (1) 54,000 (4) 2,100 404,000 1,254,500 64,000 600,000 24,000 200,000 311,600 54,900 1,254,500
  33. 33. Chapter 08 - Intercompany Indebtedness P8-20 (continued) c. Bath Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X4 Cash and Receivables Inventory Buildings and Equipment (net) Total Assets $ 242,500 332,000 680,000 $1,254,500 Accounts Payable Bonds Payable Bond Premium Stockholders’ Equity: Controlling Interest: Common Stock Retained Earnings Total Controlling interest Noncontrolling Interest Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity 8-33 $600,000 24,000 $200,000 311,600 $511,600 54,900 $ 64,000 624,000 566,500 $1,254,500
  34. 34. Chapter 08 - Intercompany Indebtedness P8-21 Computations Relating to Bond Purchase from Nonaffiliate a. b. c. Balance reported, December 31, 20X4 Amortization of premium during 20X4: Annual amortization ($5,600 / 7 years) Portion of year held Amortized in 20X4 Purchase price of bonds $105,600 $800 x .75 Carrying value of liability at date of acquisition: Carrying value at year-end Premium amortized between date of purchase and December 31, 20X4 ($1,000 x .75) Carrying value at acquisition Purchase price Gain on constructive retirement 600 $106,200 $107,000 750 $107,750 (106,200) $ 1,550 Eliminating entries, December 31, 20X4: E(1) Bonds Payable Bond Premium Interest Income Investment in Bliss Company Bonds Interest Expense Gain on Bond Retirement Elimination of interest income: Interest income at nominal rate ($100,000 x .10) Annual amortization of premium by Parsons Annual interest income recorded by Parsons Portion of year held by Parsons Interest income for 20X4 Elimination of interest expense: Interest expense at nominal rate ($100,000 x .10) Annual amortization of premium by Bliss ($10,000 / 10 years) Annual interest expense recorded by Bliss Portion of year held by Parsons Interest expense eliminated E(2) Interest Payable Interest Receivable 100,000 7,000 6,900 $10,000 (800) $ 9,200 x .75 $ 6,900 $10,000 (1,000) $ 9,000 x .75 $ 6,750 5,000 8-34 105,600 6,750 1,550 5,000
  35. 35. Chapter 08 - Intercompany Indebtedness P8-22 Computations following Parent's Acquisition of Subsidiary Bonds a. Book value of bonds purchased by Mainstream Corporation: Balance reported, December 31, 20X5 Amortization of premium in 20X4 and 20X5 ($11,250 / 3 years) x 2 years Balance at date of purchase Proportion of bonds purchased by Mainstream Book value of bonds purchased $111,250 7,500 $118,750 x .40 $47,500 Amount paid by Mainstream to purchase bonds: Bond investment, December 31, 20X5 Amortization of premium in 20X4 and 20X5 ($2,400 / 3 years) x 2 years Purchase price Gain on bond retirement b. c. Bonds Payable Bond Premium Interest Income Investment in Offenberg Company Bonds Interest Expense Retained Earnings, January 1 Noncontrolling Interest Eliminate intercorporate bond holdings: $4,500 = $11,250 x .40 $3,200 = ($40,000 x .10) - $800 $2,500 = ($40,000 x .10) - ($3,750 x .40) $2,240 = ($3,500 - $700) x .80 $560 = ($3,500 - $700) x .20 Retained earnings of Mainstream Corporation Unrecognized gain on bond retirement: Gain at date of repurchase Interest differential recognized [($3,200 - $2,500) x 2 years] Unrecognized balance Proportion of stock held by Mainstream Consolidated retained earnings 8-35 $42,400 1,600 40,000 4,500 3,200 (44,000) $ 3,500 42,400 2,500 2,240 560 $500,000 $3,500 (1,400) $2,100 x .80 1,680 $501,680
  36. 36. Chapter 08 - Intercompany Indebtedness P8-23 Consolidation Workpaper — Year of Retirement a. Elimination Entries (not required): E(1) Income from Subsidiary Dividends Declared Investment in Brown Corporation Eliminate income from subsidiary: $18,000 = $30,000 x .60 18,000 E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $14,960 = ($30,000 + $7,000 + $400) x .40 14,960 E(3) Common Stock – Brown Corporation Retained Earnings, January 1 Investment in Brown Stock Noncontrolling Interest Eliminate beginning investment balance. 100,000 50,000 Bonds Payable Bond Premium Investment in Brown Bonds Gain on Bond Retirement Eliminate intercorporate bond holdings: $7,000 = $28,000 / 4 50,000 7,000 Retained Earnings, January 1 Noncontrolling Interest Operating Expenses Depreciable Assets (net) Eliminate unrealized gain on upstream sale of building: $3,360 = [$6,000 - ($6,000 / 15)] x .60 $2,240 = [$6,000 - ($6,000 / 15)] x .40 $400 = ($30,000 / 15) - ($40,000 / 25) $5,200 = [$30,000 - ($2,000 x 2)] - [$40,000 - ($1,600 x 12)] 3,360 2,240 E(4) E(5) 8-36 6,000 12,000 4,000 10,960 90,000 60,000 50,000 7,000 400 5,200
  37. 37. Chapter 08 - Intercompany Indebtedness P8-23 (continued) Tyler Manufacturing and Brown Corporation Consolidation Workpaper December 31, 20X3 Item Sales Income from Subsidiary Gain on Bond Retirement Credits Interest Expense Operating Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward Tyler Mfg. Brown Corp. 400,000 18,000 200,000 Eliminations Debit Credit (1) 18,000 95,800 30,000 Ret. Earnings, Jan. 1 150,000 50,000 Income, from above Dividends Declared 95,800 245,800 (40,000) 30,000 80,000 (10,000) Ret. Earnings, Dec. 31, carry forward 205,800 68,000 100,000 120,000 360,000 800,000 94,200 200,000 300,000 52,000 200,000 28,000 100,000 205,800 70,000 Credits 800,000 450,000 7,400 (1) 6,000 (2) 4,000 86,320 7,000 607,000 40,000 451,800 (491,800) 115,200 (14,960) 100,240 146,640 100,240 246,880 (40,000) 17,400 206,880 (5) 5,200 50,000 102,000 8-37 400 (3) 50,000 (5) 3,360 32,960 450,000 Accounts Payable Bonds Payable Bond Premium Common Stock Retained Earnings, from above Noncontrolling Interest 7,000 7,400 55,000 75,000 110,000 210,000 Debits (4) (2) 14,960 32,960 70,000 Cash Accounts Receivable Inventory Depreciable Assets (net) Investment in: Brown Bonds Brown Stock 600,000 (5) 418,000 200,000 20,000 20,000 302,200 150,000 (322,200) (170,000) Consolidated 123,000 175,000 230,000 564,800 (4) 50,000 (1) 12,000 (3) 90,000 146,200 350,000 21,000 300,000 (4) 50,000 (4) 7,000 (3)100,000 (5) 86,320 2,240 245,560 1,092,800 17,400 (2) 10,960 (3) 60,000 245,560 206,880 68,720 1,092,800
  38. 38. Chapter 08 - Intercompany Indebtedness P8-23 (continued) b. Tyler Manufacturing and Subsidiary Consolidated Balance Sheet December 31, 20X3 Cash Accounts Receivable Inventory Total Current Assets Depreciable Assets (net) Total Assets $ 123,000 175,000 230,000 $ 528,000 564,800 $1,092,800 Accounts Payable Bonds Payable Bond Premium Stockholders’ Equity: Controlling Interest: Common Stock Retained Earnings Total Controlling Interest Noncontrolling Interest Total Stockholders’ Equity Total Liabilities and Stockholders' Equity $350,000 21,000 $300,000 206,880 $506,880 68,720 $ 146,200 371,000 575,600 $1,092,800 Tyler Manufacturing and Subsidiary Consolidated Income Statement Year Ended December 31, 20X3 Sales Gain on Bond Retirement Total Revenue Interest Expense Operating Expenses Total Expenses Consolidated Net Income Income to Noncontrolling Interest Income to Controlling Interest $ 40,000 451,800 $600,000 7,000 $607,000 (491,800) $115,200 (14,960) $100,240 Tyler Manufacturing and Subsidiary Consolidated Statement of Retained Earnings Year Ended December 31, 20X3 Retained Earnings, January 1, 20X3 Income to Controlling Interest, 20X3 $146,640 100,240 $246,880 (40,000) $206,880 Dividends Declared, 20X3 Retained Earnings, December 31, 20X3 8-38
  39. 39. Chapter 08 - Intercompany Indebtedness P8-24 Consolidation Workpaper — Year after Retirement a. Elimination Entries (not required): E(1) Income from Subsidiary Dividends Declared Investment in Stone Container Stock Eliminate income from subsidiary: $30,000 = $50,000 x .60 30,000 E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: 20,400 Income to Noncontrolling Interest: Reported net income of Stone Container Amortization of loss on bond retirement: Carrying value of bond investment Par value of debt Unamortized premium paid by Bennett Number of years until maturity Amortization of premium annually Realized net income of Stone Container Proportion of stock held by noncontrolling interest Income to Noncontrolling Interest E(3) E(4) 4,000 16,400 $50,000 $106,000 100,000) $ ÷ 6,000 6 1,000 $51,000 x .40 $20,400 Common Stock – Brown Corporation Retained Earnings, January 1 Investment in Brown Stock Noncontrolling Interest Eliminate beginning investment balance. 100,000 70,000 Bonds Payable Retained Earnings Noncontrolling Interest Interest Income Investment in Stone Container Bonds Interest Expense Eliminate intercorporate bond holdings. 100,000 4,200 2,800 8,000 8-39 6,000 24,000 102,000 68,000 106,000 9,000
  40. 40. Chapter 08 - Intercompany Indebtedness P8-24 (continued) a. Bennett Corporation and Stone Container Company Consolidation Workpaper December 31, 20X4 Item Sales Interest Income Income from Subsidiary Credits Interest Expense Other Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward Bennett Corp. Stone Container 450,000 250,000 8,000 30,000 488,000 250,000 20,000 18,000 368,600 182,000 (388,600) (200,000) 99,400 50,000 Ret. Earnings, Jan. 1 214,200 70,000 Income, from above Dividends Declared 99,400 313,600 (40,000) 50,000 120,000 (10,000) Ret. Earnings, Dec. 31, carry forward 273,600 61,600 100,000 120,000 340,000 853,600 80,000 200,000 300,000 50,000 200,000 100,000 273,600 110,000 Credits 853,600 460,000 (2) 20,400 58,400 9,000 (3) 70,000 (4) 4,200 58,400 9,000 460,000 Accounts Payable Bonds Payable Common Stock Retained Earnings, from above Noncontrolling Interest 9,000 20,000 80,000 110,000 250,000 Debits (4) (1) (2) 132,600 Consolidated 700,000 (4) 8,000 (1) 30,000 110,000 Cash Accounts Receivable Inventory Other Assets Investment in Stone Container Bonds Investment in Stone Container Stock Eliminations Debit Credit 6,000 4,000 19,000 700,000 29,000 550,600 (579,600) 120,400 (20,400) 100,000 210,000 100,000 310,000 (40,000) 270,000 81,600 180,000 230,000 590,000 106,000 (4)106,000 126,000 (1) 24,000 (3)102,000 8-40 130,000 300,000 300,000 (4)100,000 (3)100,000 (4) 132,600 2,800 335,400 1,081,600 19,000 (2) 16,400 (3) 68,000 335,400 270,000 81,600 1,081,600
  41. 41. Chapter 08 - Intercompany Indebtedness P8-24 (continued) b. Bennett Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X4 Cash Accounts Receivable Inventory Total Current Assets Other Assets Total Asset $ 81,600 180,000 230,000 $ 491,600 590,000 $1,081,600 Accounts Payable Bonds Payable Stockholders’ Equity: Controlling Interest: Common Stock Retained Earnings Total Controlling Interest Noncontrolling Interest Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $ 130,000 300,000 $300,000 270,000 $570,000 81,600 651,600 $1,081,600 Bennett Corporation and Subsidiary Consolidated Income Statement December 31, 20X4 Sales Interest Expense Other Expenses Total Expenses Consolidated Net Income Income to Noncontrolling Interest Income to Controlling Interest $ 29,000 550,600 $700,000 (579,600) $120,400 (20,400) $100,000 Bennett Corporation and Subsidiary Consolidated Statement of Retained Earnings Year Ended December 31, 20X4 Retained Earnings, January 1, 20X4 Income to Controlling Interest, 20X4 $210,000 100,000 $310,000 (40,000) $270,000 Dividends Declared, 20X4 Retained Earnings, December 31, 20X4 8-41
  42. 42. Chapter 08 - Intercompany Indebtedness P8-25 Intercorporate Inventory and Debt Transfers a. b. Consolidated cost of goods sold for 20X7: Amount reported by Lance Corporation Amount reported by Avery Company Adjustment for unrealized profit in beginning inventory sold in 20X7 Adjustment for inventory purchased from subsidiary and resold during 20X7: CGS recorded by Lance CGS recorded by Avery ($60,000 - $27,000) Total recorded CGS based on Lance's cost [$40,000 x ($33,000 / $60,000)] Required adjustment Cost of goods sold $620,000 240,000 (15,000) $40,000 33,000 $73,000 (22,000) Consolidated inventory balance: Amount reported by Lance Amount reported by Avery Total inventory reported Unrealized profit in ending inventory held by Avery [$20,000 x ($27,000 / $60,000)] Consolidated balance c. (51,000) $794,000 $167,000 120,000 $287,000 (9,000) $278,000 Entry to record interest expense for Avery Company: Interest Expense Bond Premium Cash 15,200 800 Computation of interest expense Par value of bonds issued Stated interest rate Annual interest payment Annual amortization of premium ($4,800 / 6 years) Interest expense for 20X7 8-42 16,000 $200,000 x .08 $ 16,000 (800) $ 15,200
  43. 43. Chapter 08 - Intercompany Indebtedness P8-25 (continued) d. Entry to record interest income for Lance Corporation: Cash Investment in Avery Company Bonds Interest Income 6,400 200 Computation of interest income Annual payment received ($80,000 x .08) Amortization of discount [($80,000 - $78,400) / 8 years] Interest income for 20X7 e. $6,400 200 $6,600 Income assigned to noncontrolling interest: Net income reported by Avery Company Adjustment for realization of profit on inventory sold to Lance in 20X6 Adjustment for realization of constructive gain on bond retirement ($4,160 / 8 years) Realized net income of Avery for 20X7 Proportion of ownership held by noncontrolling Interest Income assigned to noncontrolling interest Computation of constructive gain on bond retirement Par value of bonds outstanding Bond premium, December 31, 20X7 $4,800 Remaining years’ to maturity ÷ 6 Amortization per year $ 800 Years’ to maturity at purchase x 8 Premium, December 31, 20X5 Book value of bonds Proportion purchased Book value of bonds purchased Purchase price Constructive gain f. 6,600 $48,000 15,000 (520) $62,480 x .25 $15,620 $200,000 6,400 $206,400 x .40 $ 82,560 (78,400) $ 4,160 Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Avery Company Stock Eliminate income from subsidiary. 36,000 E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $15,620 = ($48,000 + $15,000 - $520) x .25 15,620 8-43 18,000 18,000 6,000 9,620
  44. 44. Chapter 08 - Intercompany Indebtedness 8-44
  45. 45. Chapter 08 - Intercompany Indebtedness P8-25 (continued) E(3) E(4) Common Stock — Avery Company Retained Earnings, January 1 Investment in Avery Company Stock Noncontrolling Interest Eliminate beginning investment balance. 50,000 170,000 Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of Avery Company: $11,250 = $15,000 x .75 $3,750 = $15,000 x .25 11,250 3,750 E(5) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Lance Corporation. 60,000 E(6) Bonds Payable Bond Premium Interest Income Investment on Avery Company Bonds Interest Expense Retained Earnings, January 1 Noncontrolling Interest Eliminate intercorporate bond holdings: $1,920 = ($3,200 / 10 years) x 6 years $6,600 = ($80,000 x .08) + ($1,600 / 8 years) $78,800 = $78,400 + [($1,600 / 8 years) x 2 years] $6,080 = ($80,000 x .08) - ($3,200 / 10 years) $2,730 = ($4,160 - $520) x .75 $910 = ($4,160 - $520) x .25 80,000 1,920 6,600 8-45 165,000 55,000 15,000 51,000 9,000 78,800 6,080 2,730 910
  46. 46. Chapter 08 - Intercompany Indebtedness P8-25 (continued) g. Lance Corporation and Avery Company Consolidation Workpaper December 31, 20X7 Item Sales Interest and Other Income Income from Subsidiary Credits Cost of Goods Sold Depreciation Expense Interest and Other Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward Lance Corp. Avery Co. 750,000 320,000 (5) 60,000 1,010,000 16,000 36,000 802,000 620,000 5,000 14,400 325,000 240,000 (6) 6,600 (1) 36,000 45,000 15,000 48,000 Ret. Earnings, Jan. 1 291,700 170,000 Income, from above Dividends Declared 102,000 393,700 (50,000) 48,000 218,000 (24,000) Ret. Earnings, Dec. 31, carry forward 343,700 194,000 37,900 110,000 30,000 167,000 90,000 500,000 48,800 105,000 15,000 120,000 40,000 250,000 Debits (4) 15,000 (5) 51,000 35,000 22,000 (700,000) (277,000) 102,000 Cash Accounts Receivable Other Receivables Inventory Land Buildings and Equipment Investment in Avery Company Bonds Investment in Avery Company Stock Eliminations Debit Credit (6) (2) 15,620 118,220 (3)170,000 (4) 11,250 118,220 6,080 72,080 (6) 2,730 72,080 (1) 18,000 (2) 6,000 299,470 98,810 (5) 9,000 78,800 (1) 18,000 (3)165,000 1,024,400 794,000 60,000 50,920 (904,920) 119,480 (15,620) 103,860 283,180 103,860 387,040 (50,000) 337,040 86,700 215,000 45,000 278,000 130,000 750,000 (6) 78,800 183,000 Consolidated 1,196,700 578,800 8-46 1,504,700
  47. 47. Chapter 08 - Intercompany Indebtedness P8-25 (continued) Item Accum. Depreciation Accounts Payable Other Payables Bonds Payable Bond Premium Common Stock Lance Corporation Avery Company Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest Credits Lance Corp. 155,000 118,000 40,000 250,000 250,000 Avery Co. Eliminations Debit Credit 75,000 35,000 20,000 200,000 4,800 (6) 80,000 (6) 1,920 50,000 (3) 50,000 230,000 153,000 60,000 370,000 2,880 250,000 40,000 343,700 Consolidated 40,000 578,800 8-47 299,470 98,810 337,040 (4) 3,750 1,196,700 194,000 (2) 9,620 (3) 55,000 (6) 910 435,140 61,780 1,504,700 435,140
  48. 48. Chapter 08 - Intercompany Indebtedness P8-26 Intercorporate Bond Holdings and Other Transfers a. Eliminating entries, December 31, 20X8: E(1) Income from Subsidiary Dividends Declared Investment in Skate Company Stock Eliminate income from subsidiary. E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $7,650 = ($30,000 + $600) x .25 E(3) Common Stock – Skate Company Additional Paid-In Capital – Skate Company Retained Earnings, January 1 Investment in Skate Company Stock Noncontrolling Interest Eliminate beginning investment balance. E(4) E(5) 22,500 7,650 30,000 20,000 150,000 Buildings and Equipment 60,000 Retained Earnings, January 1 15,000 Depreciation Expense Accumulated Depreciation Eliminate unrealized profit on buildings: $60,000 = $125,000 - $65,000 $15,000 = $65,000 - ($125,000 - $75,000) $1,500 = ($65,000 / 10 years) - ($125,000 / 25 years) $73,500 = ($5,000 x 16 years) - ($6,500 x 1 year) Retained Earnings, January 1 Noncontrolling Interest Land Eliminate unrealized profit on land. 8-48 9,750 3,250 7,500 15,000 2,500 5,150 150,000 50,000 1,500 73,500 13,000
  49. 49. Chapter 08 - Intercompany Indebtedness P8-26 (continued) E(6) E(7) Bonds Payable Interest Income Retained Earnings, January 1 Noncontrolling Interest Investment in Skate Company Bonds Interest Expense Bond Discount Eliminate intercorporate bond holdings: $3,600 = ($40,000 x .10) - ($2,800 / 7 years) $3,150 = ($42,800 - $38,600) x .75 $1,050 = ($42,800 - $38,600) x .25 $42,400 = $42,800 - ($2,800 / 7 years) $4,200 = ($40,000 x .10) + ($2,000 / 10 years) $1,200 = ($2,000 / 10 years) x 6 years Interest and Other Payables Interest and Other Receivables Eliminate intercompany interest receivable/payable. 40,000 3,600 3,150 1,050 2,000 42,400 4,200 1,200 2,000
  50. 50. Chapter 08 - Intercompany Indebtedness P8-26 (continued) b. Pond Corporation and Skate Company Consolidation Workpaper December 31, 20X8 Item Sales Income from Subsidiary Interest Income Credits Cost of Goods Sold Other Operating Expenses Depreciation Expense Interest Expense Miscellaneous Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward Pond Corp. Skate Co. 450,000 250,000 22,500 18,500 491,000 250,000 285,000 136,000 50,000 40,000 35,000 24,000 24,000 10,500 11,900 9,500 (405,900) (220,000) 85,100 30,000 Ret. Earnings, Jan. 1 250,400 150,000 Income, from above Dividends Declared 85,100 335,500 (30,000) 30,000 180,000 (10,000) Ret. Earnings, Dec. 31, carry forward 305,500 170,000 53,100 176,000 10,000 50,000 22,000 240,000 (4) 1,500 (6) 4,200 (2) 7,650 33,750 5,700 (3)150,000 (4) 15,000 (5) 9,750 (6) 3,150 33,750 5,700 Cash Accounts Receivable Interest and Other Receivables Inventory Land Buildings and Equipment Investment in Skate: Company Stock Company Bonds Investment in Tin Co. Bonds Bond Discount Debits 165,000 1,205,500 15,700 14,900 714,900 421,000 90,000 57,500 30,300 21,400 (620,200) 94,700 (7,650) 87,050 222,500 87,050 309,550 (30,000) 279,550 100,100 241,000 (7) 2,000 (4) 60,000 (5) 13,000 53,000 190,000 59,000 700,000 (1) 15,000 (3)150,000 (6) 42,400 42,400 134,000 (1) 7,500 (2) 2,500 211,650 Consolidated 700,000 (1) 22,500 (6) 3,600 47,000 65,000 45,000 140,000 50,000 400,000 Eliminations Debit Credit 3,000 437,000 (6) 1,200 134,000 1,800 1,478,900
  51. 51. Chapter 08 - Intercompany Indebtedness P8-26 (continued) Item Accum. Depreciation Accounts Payable Interest & Other Payables Bonds Payable Common Stock Pond Corporation Skate Company Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest Credits Pond Corp. Skate Co. 185,000 65,000 45,000 300,000 94,000 11,000 12,000 100,000 (7) 2,000 (6) 40,000 30,000 (3) 30,000 155,000 20,000 (3) 20,000 305,500 170,000 211,650 15,700 279,550 437,000 (5) 3,250 (6) 1,050 367,950 (2) 5,150 (3) 50,000 367,950 50,850 1,478,900 150,000 1,205,500 Eliminations Debit Credit (4) 73,500 Consolidated 352,500 76,000 55,000 360,000 150,000 155,000
  52. 52. Chapter 08 - Intercompany Indebtedness P8-27 Comprehensive Multiple-Choice Questions 1. b $374,000 [$200,000 + $180,000 - .30($70,000 - $50,000)] 2. b $294,000 [$220,000 + $140,000 - $2,000 - ($70,000 - $6,000)] 3. a $7,400 [($100,000 x .09) - ($6,400 premium / 4 years)] 4. b $32,000 [$24,000 + ($16,000 / 2)] 5. b $13,125 ($293,125 - $200,000 - $50,000 - $30,000) 6. d $83,000 ($50,000 + $30,000 + $3,000) 7. b $3,000 Purchase price [$106,400 + ($6,400 / 4 years)] Book value [$100,000 + $4,000 + ($4,000 / 4 years)] Loss on bond retirement Reported net income of Grange Corporation Add: Inventory profits of prior period realized in 20X6 Less: Unrealized inventory profits of 20X6 Less: Loss on bond retirement, January 1, 20X6 Add: Interest differential in 20X6 Realized income of Grange Less: Depreciation on differential assigned to buildings and equipment Less: Impairment of goodwill Adjusted income Proportion of stock held by noncontrolling interest Income assigned to noncontrolling interest Par value of shares outstanding Retained earnings, December 31, 20X6 Less: Unrealized inventory profit Unrecorded portion of bond retirement loss ($3,000 - $600) Add: Unamortized differential assigned to buildings and equipment ($30,000 $9,000) Unimpaired goodwill ($13,125 - $7,500) Proportion of stock held by noncontrolling interest Assigned to noncontrolling interest ($13,125 - $7,500) $108,000 (105,000) $ 3,000 $40,000 2,000 (6,000) (3,000) 600 $33,600 (3,000) (7,500) $23,100 x .20 $ 4,620 $200,000 125,000 (6,000) (2,400) 21,000 5,625 $343,225 x .20 $ 68,645
  53. 53. Chapter 08 - Intercompany Indebtedness P8-28 Comprehensive Problem: Intercorporate Transfers a. Goodwill as of January 1, 20X7: Fair value of consideration given by Topp Fair value of noncontrolling interest at acquisition Total Book value of net assets at acquisition Differential at acquisition Increase in fair value of land Goodwill at acquisition b. $1,152,000 128,000 $1,280,000 (1,200,000) $ 80,000 (30,000) $ 50,000 Computation of balance in investment account, January 1, 20X7: Bussman stockholders' equity, January 1, 20X7: Common stock Premium on common stock Retained earnings Stockholders' equity, January 1, 20X7 Topp's ownership share Book value of shares held by Topp Differential at January 1, 20X7 ($80,000 x .90) Balance in Investment in Bussman Stock account, January 1, 20X7 $ 500,000 280,000 470,000 $1,250,000 x .90 $1,125,000 72,000 $1,197,000 Computation of balance in investment account, December 31, 20X7: (not required) Balance in Investment in Bussman Stock account, January 1, 20X7 Add: Income from subsidiary, 20X7 Less: Dividends received ($40,000 x .90) Balance in Investment in Bussman Stock account, December 31, 20X7 c. $1,197,000 90,000 (36,000) $1,251,000 Gain on constructive retirement of Bussman's bonds: Original proceeds from issuance of Bussman bonds Premium amortized to January 2, 20X7: ($10,000 / 10) x 6 Book value of bonds at constructive retirement Price paid for Bussman bonds by Topp Gain on constructive retirement of Bussman's bonds $1,010,000 (6,000) $1,004,000 (980,000) $ 24,000
  54. 54. Chapter 08 - Intercompany Indebtedness d. Income to noncontrolling interest, 20X7: Bussman's 20X7 net income Add: 20X6 intercompany profit realized in 20X7 Constructive gain on retirement of bonds Less: Unrealized intercompany profit on 20X7 transfer Portion of constructive gain on bond retirement recognized currently by separate affiliates ($24,000 / 4 years) Impairment of goodwill Subsidiary income to be apportioned Noncontrolling interest's proportionate share Income to noncontrolling interest $100,000 4,500 24,000 (5,400) (6,000) (25,000) $ 92,100 x .10 $ 9,210
  55. 55. Chapter 08 - Intercompany Indebtedness P8-28 (continued) e. Total noncontrolling interest, December 31, 20X6: Bussman's stockholders' equity, December 31, 20X6 Unrealized profit on intercompany sale of inventory Bussman's realized equity, December 31, 20X6 Differential assigned to land Differential assigned to goodwill $1,250,000 (4,500) $1,245,500 30,000 50,000 $1,325,500 x .10 $ 132,550 Noncontrolling interest's proportionate share Total noncontrolling interest, December 31, 20X6 f. Elimination entries: E(1) Income from Subsidiary Dividends Declared Investment in Bussman Stock Eliminate income from subsidiary. E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $9,210 = [$100,000 + ($24,000 - $6,000) + $4,500 - $5,400 - $25,000] x .10 E(3) Common Stock — Bussman Premium on Common Stock Retained Earnings, January 1 Differential Investment in Bussman Stock Noncontrolling Interest Eliminate beginning investment balance: $80,000 = $1,280,000 - $1,200,000 $133,000 = ($500,000 + $280,000 + $470,000 + $80,000) x .10 E(4) 90,000 9,210 500,000 280,000 470,000 80,000 Land Goodwill Differential Assign differential. 30,000 50,000 E(5) Goodwill Impairment Loss Goodwill Recognize impairment of goodwill. 25,000 E(6) Bonds Payable Investment in Topp Bonds Eliminate intercompany holdings of Topp bonds. 200,000 36,000 54,000 4,000 5,210 1,197,000 133,000 80,000 25,000 200,000
  56. 56. Chapter 08 - Intercompany Indebtedness P8-28 (continued) E(7) Other Income Other Expenses Eliminate interest on intercompany holdings of Topp bonds: $200,000 x .10 E(8) Current Payables Current Receivables Eliminate accrued interest on intercompany holdings of Topp bonds: ($200,000 x .10) x 1 / 4 year E(9) Bonds Payable Premium on Bonds Payable Other Income (Interest) Investment in Bussman Bonds Gain on Retirement of Bonds Other Expenses (Interest) Eliminate intercompany holdings of Bussman bonds: $125,000 = ($1,000,000 x .12) + $5,000 $24,000 = $1,004,000 - $980,000 $119,000 = ($1,000,000 x .12) - $1,000 E(10) Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit: $4,050 = $4,500 x .90 $450 = $4,500 x .10 $4,500 = $15,000 x .30 E(11) Sales Cost of Goods Sold Inventory Eliminate upstream intercompany sale of inventory: $72,600 = ($78,000 - $18,000) + ($18,000 x .70) $5,400 = $18,000 x .30 E(12) Current Payables Current Receivables Eliminate intercompany dividend owed: $10,000 x .90 20,000 5,000 1,000,000 3,000 125,000 4,050 450 78,000 9,000 20,000 5,000 985,000 24,000 119,000 4,500 72,600 5,400 9,000
  57. 57. Chapter 08 - Intercompany Indebtedness P8-28 (continued) g. Item Topp Manufacturing and Bussman Corporation Consolidation Workpaper December 31, 20X7 Topp Eliminations Corp. Bussman Debit Credit Sales Income from Subsidiary Other Income 3,101,000 90,000 135,000 790,000 Gain on Retirement of Bonds Credits Cost of Goods Sold 3,326,000 2,009,000 821,000 430,000 Deprec. and Amortization Goodwill Impairment Loss Other Expenses 195,000 85,000 643,000 206,000 Debits Consolidated Net Income Income to NCI Income, carry forward (2,847,000) (721,000) 479,000 100,000 31,000 Ret. Earnings, Jan. 1 3,033,000 Income, from above Dividends Declared 479,000 3,512,000 (50,000) 100,000 570,000 (40,000) Ret. Earnings, Dec. 31, 3,462,000 39,500 112,500 Invest. in Bussman Bonds Invest. in Topp Bonds Land Buildings and Equipment Goodwill Differential Debits 985,000 1,231,000 2,750,000 200,000 513,000 1,835,000 6,670,000 3,011,000 1,210,000 98,000 619,000 79,000 200,000 1,000,000 Premium on Bonds Payable Common Stock Premium on Common Stock Retained Earnings Noncontrolling Interest 1,000,000 700,000 3,462,000 3,000 500,000 280,000 530,000 Credits 6,670,000 3,011,000 Accum. Depreciation Current Payables Bonds Payable 21,000 (5) (2) 25,000 24,000 (10) (11) 4,500 72,600 (7) 20,000 (9) 119,000 9,210 347,210 240,100 (3) 470,000 (10) 4,050 347,210 240,100 348,900 Inventory Invest. in Bussman Stock 3,813,000 (9) 29,000 85,100 301,000 1,251,000 78,000 90,000 20,000 125,000 530,000 Cash Current Receivables 470,000 (11) (1) (7) (9) 821,260 (4) 30,000 (4) 50,000 (3) 80,000 (8) 5,000 (12) 9,000 (6) 200,000 (9)1,000,000 (9) 3,000 (3) 500,000 (3) 280,000 821,260 (10) 450 2,978,710 Consolidated (1) (2) 36,000 4,000 280,100 (8) 5,000 (12) 9,000 (11) 5,400 (1) 54,000 (3)1,197,000 (9) 985,000 (6) 200,000 (5) (4) 25,000 80,000 24,000 3,858,000 2,361,900 280,000 25,000 710,000 (3,376,900) 481,100 (9,210) 471,890 3,028,950 471,890 3,500,840 (50,000) 3,450,840 68,500 183,600 644,500 1,774,000 4,585,000 25,000 7,280,600 1,829,000 163,000 280,100 (2) 5,210 (3) 133,000 2,978,710 1,000,000 700,000 3,450,840 137,760 7,280,600
  58. 58. Chapter 08 - Intercompany Indebtedness P8-29A Fully Adjusted Equity Method a. Adjusted trial balance: Bennett Corporation Debit Credit Item Cash Accounts Receivable Inventory Other Assets Investment in Stone Container Bonds Investment in Stone Container Stock Interest Expense Other Expenses Dividends Declared Accounts Payable Bonds Payable Common Stock Retained Earnings Sales Interest Income Income from Subsidiary Total b. $ 61,600 100,000 120,000 340,000 Stone Container Company Debit Credit $ 20,000 80,000 110,000 250,000 106,000 122,400 20,000 368,600 40,000 $1,278,600 $ 80,000 200,000 300,000 210,000 450,000 8,000 30,600 $1,278,600 18,000 182,000 10,000 $670,000 $ 50,000 200,000 100,000 70,000 250,000 $670,000 Journal entries recorded by Bennett Corporation: (1) Cash Investment in Stone Container Stock Record dividend from Stone Container: $10,000 x .60 (2) Investment in Stone Container Stock Income from Subsidiary Record equity-method income: $50,000 x .60 6,000 30,000 6,000 30,000
  59. 59. Chapter 08 - Intercompany Indebtedness P8-29A (continued) (3) Investment in Stone Container Stock Income from Subsidiary Adjust for portion of loss on constructive retirement recognized: ($7,000 / 7 years) x .60 600 600 Computation of 20X3 constructive loss on bond retirement Bond investment, December 31, 20X4 Amortization of premium in 20X4: Interest income based on par value Interest income recorded by Bennett Amortization of premium Purchase price paid by Bennett, December 31, 20X3 Bond liability reported by Stone Container, December 31, 20X3 Constructive loss on bond retirement c. $106,000 $ 9,000 (8,000) 1,000 $107,000 (100,000) $ 7,000 Eliminating entries, December 31, 20X4: E(1) Income from Subsidiary Dividends Declared Investment in Stone Container Stock Eliminate income from subsidiary. 30,600 E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $20,400 = ($50,000 + $1,000) x .40 20,400 E(3) Common Stock – Stone Container Retained Earnings, January 1 Investment in Stone Container Stock Noncontrolling Interest Eliminate beginning investment balance. 100,000 70,000 Bonds Payable Interest Income Investment in Stone Container Stock Noncontrolling Interest Investment in Stone Container Bonds Interest Expense Eliminate intercompany bond holdings: $4,200 = $7,000 constructive loss x .60 $2,800 = $7,000 constructive loss x .40 100,000 8,000 4,200 2,800 E(4) 6,000 24,600 4,000 16,400 102,000 68,000 106,000 9,000
  60. 60. Chapter 08 - Intercompany Indebtedness P8-29A (continued) d. Bennett Corporation and Stone Container Company Consolidation Workpaper December 31, 20X4 Item Sales Interest Income Income from Subsidiary Credits Interest Expense Other Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward Bennett Corp. Stone Container 450,000 8,000 30,600 488,600 20,000 368,600 (388,600) 250,000 250,000 18,000 182,000 (200,000) 100,000 50,000 Dividends Declared 210,000 100,000 310,000 (40,000) Ret. Earnings, Dec. 31, carry forward Eliminations Debit Credit 700,000 (4) 8,000 (1) 30,600 (4) 9,000 (2) 20,400 59,000 9,000 70,000 50,000 120,000 (10,000) (3) 70,000 59,000 9,000 270,000 110,000 129,000 Cash Accounts Receivable Inventory Other Assets Investment in Stone Container Bonds Investment in Stone Container Stock 61,600 100,000 120,000 340,000 20,000 80,000 110,000 250,000 Debits 850,000 460,000 Accounts Payable Bonds Payable Common Stock Retained Earnings, from above Noncontrolling Interest 80,000 200,000 300,000 50,000 200,000 100,000 270,000 110,000 Credits 850,000 460,000 Ret. Earnings, Jan. 1 Income, from above Consolidated (1) 6,000 (2) 4,000 19,000 700,000 29,000 550,600 (579,600) 120,400 (20,400) 100,000 210,000 100,000 310,000 (40,000) 270,000 81,600 180,000 230,000 590,000 106,000 (4)106,000 122,400 (4) 4,200 (1) 24,600 (3)102,000 130,000 300,000 300,000 (4)100,000 (3)100,000 (4) 129,000 2,800 336,000 1,081,600 19,000 (2) 16,400 (3) 68,000 336,000 270,000 81,600 1,081,600
  61. 61. Chapter 08 - Intercompany Indebtedness P8-30A Cost Method a. Journal entry recorded by Bennett Corporation: Cash Dividend Income Record dividend from Stone Container: $10,000 x .60 b. 6,000 6,000 Eliminating entries, December 31, 20X4: E(1) Dividend Income Dividends Declared Eliminate dividend income from subsidiary. 6,000 E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $20,400 = ($50,000 + $1,000) x .40 E(3) Common Stock – Stone Container Retained Earnings, January 1 Investment in Stone Container Stock Noncontrolling Interest Eliminate investment balance at date of acquisition: $75,000 = ($100,000 + $25,000) x .60 100,000 25,000 E(4) Retained Earnings, January 1 Noncontrolling Interest Assign undistributed prior earnings of subsidiary to noncontrolling interest: ($70,000 - $25,000) x .40 18,000 E(5) Bonds Payable Interest Income Retained Earnings, January 1 Noncontrolling Interest Investment in Stone Container Bonds Interest Expense Eliminate intercompany bond holdings: $4,200 = $7,000 constructive loss x .60 $2,800 = $7,000 constructive loss x .40 20,400 100,000 8,000 4,200 2,800 6,000 4,000 16,400 75,000 50,000 18,000 106,000 9,000
  62. 62. Chapter 08 - Intercompany Indebtedness P8-30A (continued) Computation of 20X3 constructive loss on bond retirement Bennett's Bond investment, December 31, 20X4 Amortization of premium in 20X4: Interest income based on par value Interest income recorded by Bennett Amortization of premium Purchase price paid by Bennett, December 31, 20X3 Bond liability reported by Stone Container, December 31, 20X3 Constructive loss on bond retirement $106,000 $9,000 (8,000) 1,000 $107,000 (100,000) $ 7,000
  63. 63. Chapter 08 - Intercompany Indebtedness P8-30A (continued) c. Bennett Corporation and Stone Container Company Consolidation Workpaper December 31, 20X4 Item Sales Interest Income Dividend Income Credits Interest Expense Other Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward Bennett Corp. Stone Container 450,000 250,000 8,000 6,000 464,000 250,000 20,000 18,000 368,600 182,000 (388,600) (200,000) 75,400 50,000 Ret. Earnings, Jan. 1 187,200 70,000 Income, from above Dividends Declared 75,400 262,600 (40,000) 50,000 120,000 (10,000) Ret. Earnings, Dec. 31, carry forward 222,600 61,600 100,000 120,000 340,000 80,000 200,000 300,000 50,000 200,000 100,000 222,600 110,000 Credits 802,600 460,000 9,000 (2) 20,400 34,400 9,000 (3) 25,000 (4) 18,000 (5) 4,200 34,400 9,000 460,000 Accounts Payable Bonds Payable Common Stock Retained Earnings, from above Noncontrolling Interest (5) (1) (2) 81,600 Consolidated 700,000 8,000 6,000 20,000 80,000 110,000 250,000 75,000 802,600 (5) (1) 110,000 Cash Accounts Receivable Inventory Other Assets Investment in Stone Container Bonds Investment in Stone Container Stock Debits Eliminations Debit Credit 6,000 4,000 19,000 700,000 29,000 550,600 (579,600) 120,400 (20,400) 100,000 210,000 100,000 310,000 (40,000) 270,000 81,600 180,000 230,000 590,000 106,000 (5)106,000 (3) 75,000 130,000 300,000 300,000 (5)100,000 (3)100,000 (5) 81,600 2,800 284,400 1,081,600 19,000 (2) 16,400 (3) 50,000 (4) 18,000 284,400 270,000 81,600 1,081,600

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