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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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Chapter 08 - Intercompany Indebtedness

8-44
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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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solusi manual advanced acc zy Chap008

  • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Chapter 08 - Intercompany Indebtedness 8-44
  • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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