solusi manual advanced acc zy Chap008

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


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


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


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


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


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


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


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


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

156,000

4,500

156,000

4,200
300

December 31, 20X2
Interest Receivable
Interest Income
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
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


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
Interest Income
c.

16,000
800

16,000
800

16,000

16,800

16,800

E(1)

E(2)

Bonds Payable
Interest Income
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


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


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.

E(1)

E(2)

b.

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

E(1)

E(2)

Bonds Payable
Interest Income
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


E8-8 Constructive Retirement at Beginning of Year
a.

E(1)

E(2)

b.

Bonds Payable
Interest Income
Interest Expense
$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

E(1)

E(2)

Bonds Payable
Interest Income
Interest Expense
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


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
E(1)

E(2)

Bonds Payable
Interest Income
Investment in Apple Corporation Bonds
Interest Expense
Interest Payable
Interest Receivable

100,000
8,000
12,000

5,000

8-14

106,000
3,000
11,000
5,000


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.

E(1)

E(2)

Bonds Payable
Bond Premium
Interest Income
Investment in Downlink Bonds
Interest Expense

(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


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:
Unamortized premium
$8,000 - [($8,000 / 10 years) x 3.5 years]
Book value of debt
Amount paid by Parent

c.

5,200
$205,200
(192,200)
$ 13,000

Consolidated net income for 20X6 will increase by $12,000:
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

E(1)

E(2)

Bonds Payable
Interest Income
Investment in Bundle Company Bonds
Interest Expense
$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

8-16

200,000
4,800
11,600

11,000

192,800
10,600
13,000

11,000


E8-12 (continued)
e.

E(1)

E(2)

f.

Bonds Payable
Interest Income
Investment in Bundle Company Bonds
Interest Expense
$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

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
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


E8-13 Elimination of Intercorporate Bond Holdings
a.

E(1)

E(2)

b.

Bonds Payable
Interest Income
Constructive Loss on Bond Retirement
Investment in Stang Corporation Bonds
Interest Expense
$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

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

c.

100,000
3,000
11,300
1,400

$ 20,000
(1,400)
$11,500
(11,300)

200
$ 18,800
x
.35
$ 6,580

E(1)

E(2)

Bonds Payable
Interest Income
Investment in Stang Corporation Bonds
Interest Expense
$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

8-18

100,000
2,500
11,300
780
420

6,000

103,500
11,500

6,000


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
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


P8-14 (continued)
d.

E(1)

Dividends Declared
Eliminate income from subsidiary.

18,000

E(2)

Income to Noncontrolling Interest
Dividends Declared
Assign income to noncontrolling interest:
$12,000 = $30,000 x .40

12,000

E(3)

Common Stock — Temple Corporation
Eliminate beginning investment balance:
$90,000 = $102,000 - $12,000
$60,000 = ($100,000 + $50,000) x .40

E(4)

Bonds payable
Interest income
Investment in Porter Company Bonds
Interest expense
$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


P8-14 (continued)
e.

Porter Company and Temple Corporation
Consolidation Workpaper
December 31, 20X2
Item

Sales
Interest Income
Credits
Cost of Goods Sold
Depreciation Expense
Interest Expense
Debits
Consolidated Net Income
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


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
$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
$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


P8-15 (continued)
d.

E(1)

Dividends Declared

E(2)

Dividends Declared
$2,500 = $25,000 x .10

2,500

E(3)

Common Stock — Tarp Company
$117,000 = $121,500 - $4,500
$13,000 = ($80,000 + $50,000) x .10

80,000
50,000

Bonds Payable
Interest Income
Investment in Tarp Company Bonds
Interest Expense
$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


P8-15 (continued)
Mega Corporation and Tarp Company
December 31, 20X4

e.

Item

Sales
Interest Income
Credits
Cost of Goods Sold
Interest Expense
Debits

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
Investment in Tarp
Company Stock

(4) 5,200
(1) 22,500

2,500
30,200

45,700

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


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)
Interest Income
Accrue interest income at year-end.
$21,000 = $30,000 x .70
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
$4,000 = $100,000 x (.08 / 2)

4,000

July 1, 20X3
Interest Expense
Cash
Semiannual payment of interest:
$500 = $10,000 / 20 semiannual payments

8-25

4,500

4,000

500
4,000


P8-16 (continued)
December 31, 20X3
Interest Expense
Interest Payable (Current Liabilities)
Accrue interest expense at year-end.
c.

4,500

500
4,000

Elimination entries, December 31, 20X3:
E(1)

Dividends Declared

E(2)

Dividends Declared
$7,800 = [$30,000 – ($56,000 / 14 years)] x .30

7,800

E(3)

Common Stock — Vincent Company
Differential
$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
Interest Expense
$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)

2,000

E(7)

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


P8-16 (continued)
Fern Corporation and Vincent Company
December 31, 20X3

d.

Item
Sales
Interest Income
Credits
Operating Expenses
Interest Expense
Debits

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


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

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


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:
Unamortized premium
$8,000 - [($8,000 / 10 years) x 4.5 years]
Book value of debt
Purchase price paid by Rupp

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
Interest income
Income expense

$ 70,000
$(18,600)
17,200

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
Interest Income
Investment in Gross Corporation Bonds
Interest Expense
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


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
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
Investment in Broadway Company Bonds
$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
($9,500) over interest income ($8,600)
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


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
over interest income recorded in 20X5
Proportion of stock held by 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


P8-20 Balance Sheet Eliminations
a.

E(1)

Common Stock — Stang Brewing Company
Retained Earnings
Investment in Stang Brewing Stock
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
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
Unrecognized portion of gain at December 31, 20X4:
Bond liability ($300,000 + $36,000) / 3
Bond investment
Unrecognized portion of gain
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


P8-20 (continued)
b.

Bath Corporation and Stang Brewing Company
Consolidated Balance Sheet Workpaper
December 31, 20X4
Stang
Brewing
Co.

Item

Bath
Corp.

Inventory

122,500
200,000

124,000
150,000

320,000

360,000

(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

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


P8-20 (continued)
c.

Bath Corporation and Subsidiary
Consolidated Balance Sheet
December 31, 20X4
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
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


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

E(1)

Bonds Payable
Bond Premium
Interest Income
Investment in Bliss Company Bonds
Interest Expense
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


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
b.

c.

Bonds Payable
Bond Premium
Interest Income
Investment in Offenberg Company Bonds
Interest Expense
$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


P8-23 Consolidation Workpaper — Year of Retirement
a.

Elimination Entries (not required):
E(1)

Dividends Declared
Investment in Brown Corporation
Eliminate income from subsidiary:
$18,000 = $30,000 x .60

18,000

E(2)

Dividends Declared
$14,960 = ($30,000 + $7,000 + $400) x .40

14,960

E(3)

Common Stock – Brown Corporation
Investment in Brown Stock
Eliminate beginning investment balance.

100,000
50,000

Bonds Payable
Bond Premium
Investment in Brown Bonds
$7,000 = $28,000 / 4

50,000
7,000

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


P8-23 (continued)
Tyler Manufacturing and Brown Corporation
December 31, 20X3

Item
Sales
Credits
Interest Expense
Operating Expenses
Debits

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)

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

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
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


P8-23 (continued)
b.

Tyler Manufacturing and Subsidiary
December 31, 20X3

Cash
Accounts Receivable
Inventory
Total Current Assets
Total Assets

$ 123,000
175,000
230,000
$ 528,000
564,800
$1,092,800

Accounts Payable
Bonds Payable
Bond Premium
Common Stock
Retained Earnings
Total Controlling Interest
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

Consolidated Income Statement
Year Ended December 31, 20X3
Sales
Total Revenue
Interest Expense
Operating Expenses
Total Expenses
Income to Controlling Interest

$ 40,000
451,800

$600,000
7,000
$607,000
(491,800)
$115,200
(14,960)
$100,240

Consolidated Statement of Retained Earnings
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


P8-24 Consolidation Workpaper — Year after Retirement
a.

Elimination Entries (not required):
E(1)

Dividends Declared
Investment in Stone Container Stock
Eliminate income from subsidiary:
$30,000 = $50,000 x .60

30,000

E(2)

Dividends Declared

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
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
Investment in Brown Stock

100,000
70,000

Bonds Payable
Retained Earnings
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


P8-24 (continued)
a.

Bennett Corporation and Stone Container Company
December 31, 20X4
Item

Sales
Interest Income
Credits
Interest Expense
Other Expenses
Debits

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


214,200

70,000

Income, from above
Dividends Declared

99,400
313,600
(40,000)

50,000
120,000
(10,000)

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

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


P8-24 (continued)
b.

Bennett Corporation and Subsidiary
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
Common Stock
Retained Earnings
Total Controlling Interest
Total Liabilities and Stockholders’ Equity

$ 130,000
300,000
$300,000
270,000
$570,000
81,600

651,600
$1,081,600

Consolidated Income Statement
December 31, 20X4
Sales
Interest Expense
Other Expenses
Total Expenses
Income to Controlling Interest

$ 29,000
550,600

$700,000
(579,600)
$120,400
(20,400)
$100,000

Consolidated Statement of Retained Earnings
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


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


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
Computation of constructive gain on bond retirement
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)

Dividends Declared
Investment in Avery Company Stock

36,000

E(2)

Dividends Declared
$15,620 = ($48,000 + $15,000 - $520) x .25

15,620

8-43

18,000
18,000

6,000
9,620


8-44


P8-25 (continued)
E(3)

E(4)

Common Stock — Avery Company
Investment in Avery Company Stock

50,000
170,000

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
$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


P8-25 (continued)
g.

Lance Corporation and Avery Company
December 31, 20X7
Item

Sales
Interest and Other
Income
Credits
Cost of Goods Sold
Interest and Other
Expenses
Debits

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


291,700

170,000

Income, from above
Dividends Declared

102,000
393,700
(50,000)

48,000
218,000
(24,000)

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
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


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


P8-26 Intercorporate Bond Holdings and Other Transfers
a.

E(1)

Dividends Declared
Investment in Skate Company Stock

E(2)

Dividends Declared
$7,650 = ($30,000 + $600) x .25

E(3)

Common Stock – Skate Company
Additional Paid-In Capital – Skate Company
Investment in Skate Company Stock

E(4)

E(5)

22,500

7,650

30,000
20,000
150,000

60,000
15,000
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)
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


P8-26 (continued)
E(6)

E(7)

Bonds Payable
Interest Income
Investment in Skate Company Bonds
Interest Expense
Bond Discount
$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


P8-26 (continued)
b.

Pond Corporation and Skate Company
December 31, 20X8
Item

Sales
Interest Income
Credits
Cost of Goods Sold
Other Operating Expenses
Interest Expense
Miscellaneous Expenses
Debits

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


250,400

150,000

Income, from above
Dividends Declared

85,100
335,500
(30,000)

30,000
180,000
(10,000)

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
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


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


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)]
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
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)
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


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)
January 1, 20X7
Add: Income from subsidiary, 20X7
Less: Dividends received ($40,000 x .90)
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


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


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)

Dividends Declared
Investment in Bussman Stock

E(2)

Dividends Declared
$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
Differential
Investment in Bussman Stock
$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


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
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)

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


P8-28 (continued)
g.

Item

Topp Manufacturing and Bussman Corporation
December 31, 20X7
Topp
Eliminations
Corp.
Bussman
Debit
Credit

Sales
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
Income to NCI

(2,847,000)

(721,000)

479,000

100,000

31,000


3,033,000

Income, from above
Dividends Declared

479,000
3,512,000
(50,000)

100,000
570,000
(40,000)


3,462,000
39,500
112,500

Invest. in Bussman Bonds
Invest. in Topp Bonds
Land
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

Common Stock
Premium on Common Stock
Retained Earnings

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


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
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
Record dividend from Stone Container:
$10,000 x .60

(2)

$50,000 x .60

6,000

30,000

6,000

30,000


P8-29A (continued)
(3)

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
c.

$106,000
$

9,000
(8,000)

1,000
$107,000
(100,000)
$ 7,000

E(1)

Dividends Declared

30,600

E(2)

Dividends Declared
$20,400 = ($50,000 + $1,000) x .40

20,400

E(3)

Common Stock – Stone Container

100,000
70,000

Bonds Payable
Interest Income
Interest Expense
$4,200 = $7,000 constructive loss x .60

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


P8-29A (continued)
d.

December 31, 20X4
Item

Sales
Interest Income
Credits
Interest Expense
Other Expenses
Debits

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)

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

80,000
200,000
300,000

50,000
200,000
100,000

270,000

110,000

Credits

850,000

460,000

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


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

E(1)

Dividend Income
Dividends Declared
Eliminate dividend income from
subsidiary.

6,000

E(2)

Dividends Declared
$20,400 = ($50,000 + $1,000) x .40

E(3)

Common Stock – Stone Container
Eliminate investment balance
at date of acquisition:
$75,000 = ($100,000 + $25,000) x .60

100,000
25,000

E(4)

Assign undistributed prior earnings of
subsidiary to noncontrolling interest:
($70,000 - $25,000) x .40

18,000

E(5)

Bonds Payable
Interest Income
Interest Expense

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


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

$106,000
$9,000
(8,000)

1,000
$107,000
(100,000)
$ 7,000


P8-30A (continued)
c.

December 31, 20X4
Item

Sales
Interest Income
Dividend Income
Credits
Interest Expense
Other Expenses
Debits

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


187,200

70,000

Income, from above
Dividends Declared

75,400
262,600
(40,000)

50,000
120,000
(10,000)

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

(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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