Chap 008

Chapter 08 - Intercompany Indebtedness
CHAPTER 8 INTERCOMPANY INDEBTEDNESS ANSWERS TO QUESTIONS Q8-1 A gain or loss on bond retirement is reported by the consolidated entity whenever (a) one of the companies purchases its own bonds from a nonaffiliate at an amount other than book value, or (b) a company within the consolidated entity purchases the bonds of an affiliate from a nonaffiliate at an amount other than book value. Q8-2 A constructive retirement occurs when the bonds of a company included in the consolidated entity are purchased by another company included within the consolidated entity. Although the debtor still considers the bonds as outstanding, and the investor views the bonds as an investment, they are constructively retired for consolidation purposes. If bonds are actually retired, the debtor purchases its own bonds from a nonaffiliate and they are no longer outstanding. Q8-3 When bonds sold to an affiliate at par value are not eliminated, bonds payable and bond investment are misstated in the balance sheet accounts and interest income and interest expense are misstated in the income statement accounts. There is also a premium or discount account to be eliminated when the bonds are not issued at par value. Unless interest is paid at year-end, there is likely to be some amount of interest receivable and interest payable to be eliminated as well. Q8-4 Both the bond investment and interest income reported by the purchaser will be improperly included. Interest expense, bonds payable, and any premium or discount recorded on the books of the debtor also will be improperly included. In addition, the constructive gain or loss on bond retirement will be omitted if no eliminating entries are recorded in connection with the purchase. Q8-5 If the focus is placed on the legal entity, only bonds actually reacquired by the debtor will be treated as retired. This treatment can lead to incorrect reports for the consolidated entity in two dimensions. If a company were to repurchase bonds from an affiliate, any retirement gain or loss reported by the debtor is not a gain or loss to the economic entity and must be eliminated in preparing consolidated statements. Moreover, although a purchase of debt of any of the other companies in the consolidated entity will not be recognized as a retirement by the debtor, when emphasis is placed on the economic entity the purchase must serve as a basis for recognition of a bond retirement for the consolidated entity. Q8-6 The difference in treatment is due to the effect of the transactions on the consolidated entity. In the case of land sold to another affiliate, a gain has been recorded that is not a gain from the viewpoint of the consolidated entity. Thus, it must be eliminated in the consolidation process. On the other hand, in a bond repurchase the buyer simply records an investment in bonds and the debtor makes no special entries because of the purchase by an affiliate. Neither company records the effect of the transaction on the economic entity. Thus, in the consolidation process an entry must be made to show the gain on bond retirement that has occurred from the viewpoint of the economic entity.
8-1
Q8-7 When there has been a direct sale to an affiliate, the interest income recorded by the purchaser should equal the interest expense recorded by the seller and the two items should have no net effect on reported income. The eliminating entries do not change consolidated net income in this case, but they will result in a more appropriate statement of the relevant income and expense categories in the consolidated income statement. Q8-8 Whenever a loss on bond retirement has been reported in a prior period, the affiliate that purchased the bonds paid more than the book value of the debt shown by the debtor. As a result, each period the interest income recorded by the buyer will be less than the interest expense reported by the debtor. When the two income statement accounts are eliminated in the consolidation process, the effect will be to increase consolidated net income. Because the full amount of the loss was recognized for consolidated purposes in the year in which the bonds were purchased by the affiliate, the effect of the elimination process in each of the periods that follow should be to increase consolidated income. Q8-9 The difference between the carrying value of the debt on the debtor's books and the carrying value of the investment on the purchaser's books indicates the amount of unrecognized gain or loss at the end of the period. To determine the amount of the gain or loss on retirement at the start of the period, the difference between interest income recorded by the purchaser on the bond that has been purchased and interest expense recorded by the debtor during the period is added to the difference between carrying values at the end of the period. Q8-10 Interest income and interest expense must be eliminated and a loss on bond retirement established in the elimination process. Consolidated net income will decrease by the amount of the loss. Because the loss is attributed to the subsidiary, income assigned to the controlling and noncontrolling interests will decrease in proportion to their share of common stock held. Q8-11 A constructive gain will be included in the consolidated income statement in this case and both consolidated net income and income to the controlling interest will increase by the full amount of the gain. Q8-12 A direct placement of subsidiary bonds with the parent should have no effect on consolidated income or on income assigned to the noncontrolling shareholders. Q8-13 When subsidiary bonds are purchased from a nonaffiliate by the parent and there is a constructive gain or loss for consolidated purposes, the gain or loss is assigned to the subsidiary and included in computing income to the noncontrolling shareholders. Q8-14 Interest income recorded by the subsidiary and interest expense recorded by the parent should be equal in the direct placement case. When the subsidiary purchases parent company bonds from a nonaffiliate, interest income and interest expense will not be the same unless the bonds are purchased from the nonaffiliate at an amount equal to the liability reported by the parent. 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.
8-2
Q8-16 A constructive loss recorded on the subsidiary's bonds in a prior period means the interest income recorded by the parent is less than the interest expense recorded by the subsidiary in each of the following periods. Consolidated net income will increase when interest income and expense are eliminated. Income assigned to the noncontrolling interest will be based on the reported net income of the subsidiary plus the difference between interest income and interest expense each period following the retirement. As a result, the amount assigned will be greater than if the bond had not been constructively retired. Q8-17 On the date the parent sells the bonds to a nonaffiliate they are issued for the first time from a consolidated perspective. While the parent will record a gain or loss on sale of the bonds on its books, none is recognized from a consolidated viewpoint. The difference between the sale price received by the parent and par value is a premium or discount. Each period there will be a need to establish the correct amount for the premium or discount account and to adjust interest expense recorded by the subsidiary to bring the reported amounts into conformity with the sale price to the nonaffiliate. Q8-18 The retirement gain or loss reported by the subsidiary when it repurchases the bonds held by the parent must be eliminated in the consolidation process. From the viewpoint of the consolidated entity the bonds were retired at the point they were purchased by the parent and a gain or loss should have been recognized at that point.
8-3
SOLUTIONS TO CASES C8-1 Recognition of Retirement Gains and Losses a. When Flood purchases the bonds it establishes an investment account on its books and Bradley establishes a bond liability and discount account on its books. No entry is made by Century. When Century purchases the bonds, Century records an investment and Flood removes the balance in the investment account and records a gain on the sale. Bradley makes no entry. When Bradley retires the issue, Bradley removes its liability and unamortized discount and records a loss on bond retirement. Century removes the bond investment account and records a loss on the sale of bonds. Flood makes no entry. b. A constructive loss on bond retirement is reported by the consolidated entity at the time Century purchases the bonds from Flood. The exact amount of the loss cannot be ascertained without knowing the maturity date of the bonds, the date of initial sale, and the date of purchase by Century. c. The initial sale of bonds by Bradley is treated as a normal transaction with no need for an adjustment to income assigned to the noncontrolling shareholders. Income assigned to noncontrolling shareholders will be reduced by a proportionate share of the loss reported in the consolidated income statement in the period in which Century purchases the bonds from Flood. In the years before the bonds are retired by Bradley, income assigned to the noncontrolling interest (assuming no differential) will be greater than a pro rata portion of the reported net income of Bradley. In the period in which the bonds are retired by Bradley, reported net income of Bradley must be adjusted to remove its loss on bond retirement before assigning income to the noncontrolling interest. No adjustment is made in the years following the repurchase by Bradley.
8-4
C8-2 Borrowing by Variable Interest Entities MEMO To: From: Re: President Hydro Corporation , 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 10-year 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 Hydros 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 entitys total assets is considered insufficient to permit the entity to finance its activities. [FIN 46R, Par 9; ASC 810-10-25-45] 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 entitys expected losses if they occur. [FIN 46R, Par. 14; ASC 810-10-25-38] Consolidation of the joint venture will result in including the production facility among Hydros 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. Hydros 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 (ASC 810)
8-5
Case 8-3 Subsidiary Bond Holdings MEMO To: From: Re: Financial Vice-President Farflung Corporation , 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; ASC 810-10-10-1] 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 Farflungs consolidated statements at December 31, 20X4, the following eliminating entry should have been included in the worksheet: 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 0.65) in income assigned to the controlling interest and a reduction of $8,400 ($24,000 x 0.35) 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: Bonds Payable Interest Income Investment in Micro Company Noncontrolling Interest Investment in Micro Company Bonds Interest Expense (a) ($400,000 x 0.08) - ($24,000/15 years) (b) $424,000 - ($24,000/15 years) (c) $400,000 x 0.08 Primary citation: ARB 51, Par. 6; ASC 810-10-45-1 400,000 30,400(a) 15,600 8,400
422,400(b) 32,000(c)
8-6
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 subsidiarys 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. 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 appear to come primarily from intercompany purchases and sales of goods.
8-7
SOLUTIONS TO EXERCISES E8-1 Bond Sale from Parent to Subsidiary a. Journal entries recorded by Humbolt Corporation: 156,000
January 1, 20X2 Investment in Lamar Corporation Bonds Cash July 1, 20X2 Cash Interest Income Investment in Lamar Corporation Bonds December 31, 20X2 Interest Receivable Interest Income Investment in Lamar Corporation Bonds b. Journal entries recorded by Lamar Corporation:
156,000
4,500
4,200 300
4,500
4,200 300
January 1, 20X2 Cash Bonds Payable Bond Premium July 1, 20X2 Interest Expense Bond Premium Cash December 31, 20X2 Interest Expense Bond Premium Interest Payable c. Eliminating entries, December 31, 20X2: 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.
156,000
150,000 6,000
4,200 300
4,500
4,200 300
4,500
150,000 5,400 8,400
155,400 8,400
4,500
4,500
8-8
E8-2 Computation of Transfer Price a. b. c. $105,000 = $100,000 par value + ($250 x 20 periods) premium $103,500 = $105,000 - ($250 x 6 periods) Eliminating entries: Bonds Payable Bond Premium Interest Income Investment in Nettle Corporation Bonds Interest Expense Interest Payable Interest Receivable 100,000 3,500 11,500
103,500 11,500 6,000
6,000
E8-3 Bond Sale at Discount a. b. $16,800 = [($600,000 x 0.08) + ($12,000 / 5 years)] x 1/3 Journal entries recorded by Wood Corporation: 16,000
January 1, 20X4 Cash Interest Receivable 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. Eliminating entries, December 31, 20X4: 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
16,000
16,000 800
16,800
16,000 800
16,800
400,000 33,600
395,200 4,800 33,600
16,000
16,000
8-9
E8-4 Evaluation of Intercorporate Bond Holdings a. b. The bonds were originally sold at a discount. Stellar purchased the bonds at par value and a constructive loss was reported. 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. 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.
c.
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] The loss on bond retirement will result in a reduction in consolidated retained earnings. [AICPA Adapted] $4,700 = ($50,000 x 0.10) - ($3,000 / 10 years) $4,000 = ($50,000 x 0.10) - ($8,000 / 8 years) c c $5,600 loss = $58,000 purchase price - [$53,000 - ($3,000 / 10 years) x 2 years] 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
2.
3. 4. 5. 6.
b a
8-10
E8-6 Multiple-Choice Questions 1. a $14,000 = [($300,000 x 0.09) - ($60,000 / 10 years)] x ($200,000 / $300,000) $12,000 = [$120,000 - ($20,000 / 10 years) x 2 years] - $104,000 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
2. 3.
c b
E8-7 Constructive Retirement at End of Year a. Eliminating entries, December 31, 20X5: 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 b. Eliminating entries, December 31, 20X6: Bonds Payable Premium on Bonds Payable Interest Income Investment in Able Company Bonds Interest Expense Investment in Able Co. NCI in NA of Able Co. $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 0.60 $4,800 = $12,000 x 0.40 Interest Payable Interest Receivable 400,000 8,400 36,200 400,000 9,000
397,000 12,000
18,000
18,000
397,200 35,400 7,200 4,800
18,000
18,000
8-11
8-12
E8-8 Constructive Retirement at Beginning of Year a. Eliminating entries, December 31, 20X5: Bonds Payable 400,000 Premium on Bonds Payable 9,000 Interest Income 36,200 Investment in Able Company Bonds 397,000 Interest Expense 35,400 Gain on Bond Retirement 12,800 $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 b. Eliminating entries, December 31, 20X6: Bonds Payable Premium on Bonds Payable Interest Income Investment in Able Company Bonds Interest Expense Investment in Able Co. NCI in NA of Able Co. Interest Payable Interest Receivable 400,000 8,400 36,200 18,000 18,000
397,200 35,400 7,200 4,800 18,000
18,000
8-13
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 Computation of book value of liability at constructive retirement Sale price of bonds ($300,000 x 0.97) Amortization of discount [($300,000 - $291,0000) / 20 years] x 7 years Book value of liability at January 1, 20X8 E8-10 Loss on Constructive Retirement Eliminating entries, December 31, 20X8: 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 $291,000 3,150 $294,150
297,120 21,450 5,400
106,000 3,000 11,000 5,000
5,000
8-14
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 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 Eliminating entries, December 31, 20X3: Bonds Payable Bond Premium Interest Income Investment in Downlink Bonds Interest Expense Gain on Bond Retirement Interest Payable Interest Receivable 100,000 6,000 4,000 $200,000 x .12 $ 24,000 (6,000) $ 18,000 (3,000) $ 15,000 $115,000 (8,000) $107,000 (100,000) $ 7,000
b.
c.
100,000 3,000 7,000 6,000
6,000
8-15
E8-12 Evaluation of Bond Retirement a. b. No gain or loss will be reported by Bundle. 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. 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. Eliminating entries, December 31, 20X6: 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. 200,000 4,800 11,600 $ 13,000 $(11,600) 10,600 $200,000 5,200 $205,200 (192,200) $ 13,000
(1,000) $ 12,000
192,800 10,600 13,000
11,000
11,000
8-16
E8-12 (continued) e. Eliminating entries, December 31, 20X7: Bonds Payable Premium on Bonds Payable Interest Income Investment in Bundle Company Bonds Interest Expense Investment in Bundle Co. NCI in NA of Bundle Co. 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 0.70 $3,600 = ($13,000 - $1,000) x 0.30 Interest Payable Interest Receivable Eliminate intercompany receivable/payable. f. 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) 21,200 200,000 4,000 23,200
194,000 21,200 8,400 3,600
11,000
11,000
(2,000) $ 48,000 x .30 $ 14,400
8-17
E8-13 Elimination of Intercorporate Bond Holdings a. Eliminating entries, December 31, 20X8: 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. b. 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. Eliminating entries, December 31, 20X9: Bonds Payable Premium on Bonds Payable Interest Income Investment in Stang Corp. NCI in NA of Stang Corp. 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 0.65 $420 = ($1,400 - $200) x 0.35 $103,500 = $104,200 - $700 $11,500 = $12,000 - ($5,000 / 10 years) Interest Payable Interest Receivable Eliminate intercompany receivable/payable. 100,000 2,500 11,300 780 420 $ 20,000 (1,400) $11,500 (11,300) 100,000 3,000 11,300 1,400
104,200 11,500
6,000
6,000
200 $ 18,800 x 0.35 $ 6,580
103,500 11,500
6,000
6,000
8-18
SOLUTIONS TO PROBLEMS P8-14 Consolidation Worksheet with Sale of Bonds to Subsidiary a. Entries recorded by Porter on its investment in Temple: Cash Investment in Temple Corporation Record dividends from Temple: $10,000 x 0.60 Investment in Temple Corporation Income from Subsidiary Record equity-method income: $30,000 x 0.60 b. Entry recorded by Porter on its bonds payable: Interest Expense 6,000 Bond Premium 400 Cash Record interest payment: $400 = ($82,000 - $80,000) / 5 years c. Entry recorded by Temple on bond investment: Cash Interest Income Investment in Porter Company Bonds 6,400 6,000 400 6,000 6,000
18,000
18,000
6,400
8-19
P8-14 (continued) d.
Book Value Calculations: NCI 40% 60,000 12,000 (4,000) 68,000 + Porter Co. 60% 90,000 18,000 (6,000) 102,000 = Common Stock 100,000 + Retained Earnings 50,000 30,000 (10,000) 70,000
Original book value + Net Income - Dividends Ending book value
100,000
Basic elimination entry Common stock Retained earnings Income from Temple Co. NCI in NI of Temple Co. Dividends declared Investment in Temple Co. NCI in NA of Temple Co. Eliminate intercorporate bond holdings Bonds Payable Bond Premium Interest Income Investment in Temple Co.'s Bonds Interest Expense
100,000 50,000 18,000 12,000 10,000 102,000 68,000
80,000 1,200 6,000 81,200 6,000
8-20
P8-14 (continued) e.
Porter Co. Income Statement Sales Interest Income Less: COGS Less: Depreciation Expense Less: Interest Expenses Income from Temple Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash and Accounts Receivable Inventory Buildings & Equipment Less: Accumulated Depreciation Investment in Porter Co.Bonds Investment in Temple Co. Total Assets Accounts Payable Bonds Payable Bond Premium Common Stock Retained Earnings NCI in NA of Temple Co. Total Liabilities & Equity 200,000 (99,800) (25,000) (6,000) 18,000 87,200 87,200 Temple Co. 114,000 6,000 (61,000) (15,000) (14,000) 30,000 30,000 Elimination Entries DR CR 6,000 6,000 18,000 24,000 12,000 36,000 6,000 6,000 (160,800) (40,000) (14,000) 0 99,200 (12,000) 87,200 Consolidated 314,000
230,000 87,200 (40,000) 277,200
50,000 30,000 (10,000) 70,000
50,000 36,000 86,000
6,000 10,000 16,000
230,000 87,200 (40,000) 277,200
80,200 120,000 500,000 (175,000 ) 102,000 627,200 68,800 80,000 1,200 200,000 277,200 627,200
40,000 65,000 300,000 (75,000) 81,200 81,200 102,00 0 183,20 0
120,200 185,000 800,000 (250,000) 0 855,200 110,000 200,000 200,000 277,200 68,000 855,200
411,200 41,200 200,000 100,000 70,000 411,200
80,000 1,200 100,00 0 86,000 267,20 0
16,000 68,000 84,000
8-21
P8-15 Consolidation Worksheet 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 0.90 Investment in Tarp Company Stock Income from Subsidiary Record equity-method income: $25,000 x 0.90 b. 18,000 18,000
22,500
22,500
Entry recorded by Mega Corporation on its investment in Tarp Company bonds: Cash 6,000 Interest Income 5,200 Investment in Tarp Company Bonds 800 Record interest payment: $800 = ($104,000 - $100,000) / 5 years
c.
Entry recorded by Tarp Company on its bonds payable: Interest Expense Bond Premium Cash 5,200 800
6,000
d.
Book Value Calculations: NCI 10% 13,000 2,500 (2,000) 13,500 + Mega Corp. 90% 117,000 22,500 (18,000) 121,500 = Common Stock 80,000 80,000 + Retained Earnings 50,000 25,000 (20,000) 55,000
Basic elimination entry Common stock Retained earnings Income from Tarp Co. NCI in NI of Tarp Co. Dividends declared Investment in Tarp Co. NCI in NA of Tarp Co. Eliminate intercorporate bond holdings Bonds Payable Bond Premium Interest Income Investment in Tarp Co.'s Bonds Interest Expense
80,000 50,000 22,500 2,500 20,000 121,500 13,500 100,000 1,600 5,200 101,600 5,200
8-22
P8-15 (continued) e.
Mega Corp. Income Statement Sales Interest Income Less: COGS Less: Depreciation Expense Less: Interest Expenses Income from Tarp Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash and Accounts Receivable Inventory Buildings & Equipment Less: Accumulated Depreciation Investment in Tarp Co.Bonds Investment in Tarp Co. Total Assets Current Payables Bonds Payable Bond Premium Common Stock Retained Earnings NCI in NA of Tarp Co. Total Liabilities & Equity 140,000 5,200 (86,000) (20,000) (16,000) 22,500 45,700 45,700 Tarp Co. 125,000 5,200 (79,800) (15,000) (5,200) 25,000 25,000 22,500 27,700 2,500 30,200 5,200 5,200 5,200 (165,800) (35,000) (16,000) 0 48,200 (2,500) 45,700 Elimination Entries DR CR Consolidated 265,000
242,000 45,700 (30,000) 257,700
50,000 25,000 (20,000) 55,000
50,000 30,200 80,200
5,200 20,000 25,200
242,000 45,700 (30,000) 257,700
22,000 165,000 400,000 (140,000 ) 101,600 121,500 670,100 92,400 200,000 120,000 257,700 670,100
36,600 75,000 240,000 (80,000) 101,60 0 121,50 0 223,10 0
58,600 240,000 640,000 (220,000)
0 718,600 127,400
271,600 35,000 100,000 1,600 80,000 55,000 271,600
100,00 0 1,600 80,000 80,200 261,80 0
200,000 25,200 13,500 38,700 120,000 257,700 13,500 718,600
8-23
P8-16 Direct Sale of Bonds to Parent a. Journal entries recorded by Fern Corporation: 2,000
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)
2,000
2,000 250
2,250
December 31, 20X3 Cash 7,000 Investment in Vincent Company Stock Record dividends for Vincent: $7,000 = $10,000 x 0.70 Interest Receivable (Current Receivables) Investment in Vincent Company Bonds Interest Income Accrue interest income at year-end. 2,000 250
7,000
2,250
Investment in Vincent Company Stock 21,000 Income from Subsidiary Record equity-method income: $21,000 = $30,000 x 0.70
21,000
Income from Vincent Co. 2,800 Investment in Vincent Company Stock 2,800 Record amortization of differential: $2,800 = ($56,000 / 14 years) x 0.70 b. Journal entries recorded by Vincent Company: January 1, 20X3 Interest Payable 4,000 Cash Record interest payment: $4,000 = $100,000 x (.08 / 2)
4,000
July 1, 20X3 Interest Expense 4,500 Discount on Bonds Payable 500 Cash 4,000 Semiannual payment of interest: $500 = $10,000 / 20 semiannual payments December 31, 20X3 Interest Expense Discount on Bonds Payable Interest Payable (Current Liabilities) Accrue interest expense at year-end. 4,500
500 4,000
8-24
P8-16 (continued) c.
Book Value Calculations: NCI 30% Original book value 45,000 + Net Income 9,000 - Dividends (3,000) Ending book value 51,000 + Fern Corp. 70% 105,000 21,000 (7,000) 119,000 = Common Stock 50,000 50,000 + Retained Earnings 100,000 30,000 (10,000) 120,000
Basic elimination entry Common stock Retained earnings Income from Vincent Co. NCI in NI of Vincent Co. Dividends declared Investment in Vincent Co. NCI in NA of Vincent Co. Excess Value (Differential) Calculations: NCI Fern Corp. 30% + 70% Beg. balance 14,400 33,600 Changes (1,200) (2,800) Ending balance 13,200 30,800 Amortized excess value reclassification entry: Depreciation expense Income from Vincent Co. NCI in NI of Vincent Co. Excess value (differential) reclassification entry: Buildings and Equipment Accumulated Depreciation Investment in Vincent Co. NCI in NA of Vincent Co. Remove gain on land: Investment in Vincent Co. NCI in NA of Vincent Co. Land Eliminate intercorporate bond holdings Bonds Payable Interest Income Investment in Vincent Bonds Interest Expense Discount on BP Interest Payable Interest Receivable
50,000 100,000 21,000 9,000 10,000 119,000 51,000 Buildings and Equipment 56,000 56,000
Acc. Depr. (8,000) (4,000) (12,000)
4,000 2,800 1,200
56,000 12,000 30,800 13,200
5,600 2,400 8,000
50,000 4,500 46,500 4,500 3,500 2,000 2,000
8-25
P8-16 (continued) d.
Fern Corp. Income Statement Sales Interest income Less: Other Expenses Less: Interest Expense Income from Vincent Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash & Current Receivables Inventory Land, Buildings, & Equipment (net) Investment in Vincent Co. Stock Investment in Vincent Co. Bonds Total Assets Current Liabilities Bonds Payable Discount on Bonds Payable Common Stock Retained Earnings NCI in NA of Vincent Co. Total Liabilities & Equity 300,000 4,500 (198,500) (27,000) 18,200 97,200 Vincent Co. 200,000 (161,000) (9,000) 30,000 4,500 4,000 21,000 29,500 9,000 38,500 4,500 2,800 7,300 1,200 8,500 Elimination Entries DR CR Consolidated 500,000 0 (363,500) (31,500) 0 105,000 (7,800) 97,200
97,200
30,000
238,800 97,200 (60,000) 276,000
100,000 30,000 (10,000) 120,000
100,000 38,500 138,500
8,500 10,000 18,500
238,800 97,200 (60,000) 276,000
30,300 170,000 320,000 144,200 46,500 711,000 35,000 300,000 100,000 276,000 711,000
46,000 70,000 180,000
2,000 56,000 5,600 12,000 8,000 119,000 30,800 46,500 218,300
74,300 240,000 536,000 0 0 850,300 66,000 350,000 (3,500) 100,000 276,000 61,800 850,300
296,000 33,000 100,000 (7,000) 50,000 120,000 296,000
61,600 2,000 50,000
3,500 50,000 138,500 2,400 242,900 18,500 51,000 13,200 86,200
8-26
P8-17 Information Provided in Eliminating Entry a. b. c. Rupp Corporation is the parent company. In the eliminating entry, noncontrolling interest is credited with a portion of the constructive gain on bond retirement. Rupp holds 75 percent ownership of Gross [$4,200 / ($4,200 + $1,400)]. 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. 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. 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 Consolidated net income f. g. Income assigned to the noncontrolling interest will decrease by $350 ($1,400 x 0.25) as a result of the eliminating entry. Eliminating entry prepared at December 31, 20X8: Bonds Payable Premium on Bonds Payable Interest Income Investment in Gross Corporation Bonds Interest Expense Investment in Gross Corp. NCI in NA of Gross Corp. Eliminate intercompany bond holdings: $1,600 = ($2,400 / 3 years) x 2 years $18,600 = ($200,000 x 0.09) + ($1,800 / 3 years) $198,800 = $198,200 + ($1,800 / 3 years) $17,200 = ($200,000 x 0.09) - ($2,400 / 3 years) $3,150 = [$7,700 - ($1,400 x 2.5 years)] x 0.75 $1,050 = [$7,700 - ($1,400 x 2.5 years)] x 0.25 200,000 1,600 18,600 $ 70,000 $(18,600) 17,200 $200,000 4,400 $204,400 (196,700) $ 7,700 $198,200 (1,500) $196,700
(1,400) $ 68,600
198,800 17,200 3,150 1,050
8-27
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 b. $102,400 400 $102,800
Interest Expense 9,500 Discount on Bonds Payable 500 Cash 9,000 Annual payment of interest: $9,500 = [$9,000 + ($3,000 / 6 years)] Cash 9,000 Investment in Broadway Company Bonds Interest Income Annual receipt of interest: $8,600 = [$9,000 - ($2,400 / 6 years)] Bonds Payable 100,000 Loss on Bond Retirement 6,300 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)] 400 8,600
c.
d.
102,800 3,500
e.
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 0.15 ($80,000 + $900) x 0.15 Income to controlling interest 20X5 20X6 $120,000 $150,000 60,000 80,000 (6,300) $173,700 (8,055) $165,645 900 $230,900 (12,135) $218,765
8-28
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 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 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 0.12) - ($10,000 / 10) Interest income: ($100,000 x 0.12) ($10,500 / 7) Excess $11,000 (10,500) $ 500 $ 30,000 500 $ 30,500 x 0.30 $ 9,150 $ 6,000 1,000 $ 7,000 100,000 $107,000
9,000 1,500 $ 10,500 100,000 $110,500
8-29
P8-20 Balance Sheet Eliminations a.

Book Value Calculations: NCI 20% 41,000 15,000 (2,000) 54,000 + Bath Corp. 80% 164,000 60,000 (8,000) 216,000 = Common Stock 100,000 100,000 + Retained Earnings 105,000 75,000 (10,000) 170,000
Reversal/Deferred GP Calculations: Total (12,000) (6,000) (18,000) = Bath Corp.'s share (12,000) (4,800) (16,800) + NCI's share (1,200) (1,200)
Downstream Deferred GP Upstream Deferred GP Total
Basic elimination entry Common stock Retained earnings Income from Stang Co. NCI in NI of Stang Co. Dividends declared Investment in Stang Co. NCI in NA of Stang Co.
100,000 105,000 43,200 13,800 10,000 199,200 52,800
Original amount invested (100%) Beginning balance in retained earnings Baths % of NI - Deferred GP + Reversal NCI share of NI - Deferred GP + Reversal 100% of Stang Co.'s dividends declared Net book value - Deferred GP + Reversal NCI share of BV - Deferred GP + Reversal
8-30
P8-20 (continued)
20X4 Downstream Transactions Total 100,000 71,429 28,571 28.57% = Re-sold 58,000 41,429 16,571 + Ending Inventory 42,000 30,000 12,000
Sales COGS Gross Profit Gross Profit %
20X4 Upstream Transactions Total 50,000 38,462 11,538 23.08% = Re-sold 24,000 18,462 5,538 + Ending Inventory 26,000 20,000 6,000
Sales COGS Gross Profit Gross Profit %
Deferral of this year's unrealized profits on inventory transfers Sales 150,000 Cost of Goods Sold 132,000 Inventory 18,000 Bond and other Debt Elimination Entries: Bonds Payable 100,000 Bond Premium 12,000 Investment in Stang Bonds Investment in Stang Stock NCI in NA of Stang Interest Payable Interest Receivable 4,000 4,000
101,500 8,400 2,100
8-31
P8-20 (continued) b.
Bath Corp. Balance Sheet Cash and Receivables Inventory Buildings & Equipment (net) Investment in Stang Co. Bonds Investment in Stang Co. Stock Total Assets Accounts Payable Bonds Payable Premium on Bonds Payable Common Stock Retained Earnings 122,500 200,000 320,000 101,500 207,600 951,600 40,000 400,000 200,000 311,600 634,000 28,000 300,000 36,000 100,000 170,000 0 4,000 100,000 12,000 100,000 105,000 43,200 13,800 150,000 528,000 Stang Co. 124,000 150,000 360,000 Elimination Entries DR CR 4,000 18,000 101,500 199,200 8,400 331,100 Consolidated 242,500 332,000 680,000 0 0 1,254,500 64,000 600,000 24,000 200,000 311,600 10,000 132,000 52,800 2,100 196,900
NCI in NA of Stang Co. Total Liabilities & Equity 951,600 634,000
54,900 1,254,500
c.
Bath Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X4 Cash and Receivables Inventory Buildings and Equipment (net) Total Assets 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 $600,000 24,000 $200,000 311,600 $511,600 54,900 $ 242,500 332,000 680,000 $1,254,500 $ 64,000 624,000
566,500 $1,254,500
8-32
P8-21 Computations Relating to Bond Purchase from Nonaffiliate Note: We accidentally changed the Investment in Bliss Perfume Company Bonds instead of Investment in Bliss Perfume Company Stock when we converted the problem from the modified to the fully adjusted equity method. The following answer is based on the following corrected Investment in Bliss Perfume Company Bonds: $105,600 a. 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 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 0.75) Carrying value at acquisition Purchase price Gain on constructive retirement Eliminating entries, December 31, 20X4: 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 0.10) 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 0.10) 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 Interest Payable Interest Receivable 100,000 7,000 6,900 $105,600 $800 x 0.75
600 $106,200
b.
$107,000 750 $107,750 (106,200) $ 1,550
c.
105,600 6,750 1,550
$10,000 (800) $ 9,200 x 0.75 $ 6,900
$10,000 (1,000) $ 9,000 x 0.75 $ 6,750 5,000 5,000
8-33
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 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. Income from Offenberg Investment in Offenberg Recognize 80% share of 1/5 of the constructive gain Bonds Payable Bond Premium Interest Income Investment in Offenberg Company Bonds Interest Expense Investment in Offenberg NCI in NA of Offenberg Eliminate intercorporate bond holdings: $4,500 = $11,250 x 0.40 $3,200 = ($40,000 x 0.10) - $800 $2,500 = ($40,000 x 0.10) - ($3,750 x 0.40) $2,240 = ($3,500 - $700) x 0.80 $560 = ($3,500 - $700) x 0.20 Consolidated retained earnings $42,400 1,600 (44,000) $ 3,500 560 $111,250 7,500 $118,750 x 0.40
$47,500
560
c.
40,000 4,500 3,200
42,400 2,500 2,240 560
d.
$501,680
8-34
P8-23 Consolidation Worksheet Year of Retirement a. Book Value Calculations: Tyler NCI + Manufacturing = Common + 40% 60% Stock Original book value 60,000 90,000 100,000 + Net Income 12,000 18,000 - Dividends (4,000) (6,000) Ending book value 68,000 102,000 100,000
Retained Earnings 50,000 30,000 (10,000) 70,000
Reversal/Deferred GP Calculations: Total = Constructive Gain 7,000 Extra Depreciation 400 Total 7,400
Basic elimination entry Common stock Retained earnings Income from Brown Corp. NCI in NI of Brown Corp. Dividends declared Investment in Brown Corp. NCI in NA of Brown Corp. 100,000 50,000 22,440 14,960
Tylers share + NCI's share 4,200 2,800 240 160 4,440 2,960
Original amount invested (100%) Beginning balance in retained earnings Tylers % of NI + Retirement Gain + Excess Depr. NCI share of NI + Retirement Gain + Excess Depr. 10,000 106,440 70,960 100% of Brown Corp.'s dividends declared Net book value + Retirement Gain + Excess Depr. NCI share of BV + Retirement Gain + Excess Depr.
Lofton Co. Temple Corp.
Equipment 30,000 10,000 40,000
Actual "As If"
Accumulated Depreciation 4,000 400 15,600 19,200
Eliminate the gain on Equipment and correct asset's basis: Investment in Temple Corp. 3,360 NCI in NA of Temple Corp. 2,240 Equipment 10,000 Accumulated Depreciation 15,600 Accumulated Depreciation Depreciation Expense Bond Elimination Entry: Bonds Payable Bond Premium Investment in Brown Bonds Gain on Bond Retirement 400 400 50,000 7,000 50,000 7,000
8-35
P8-23 (continued)
Tyler Income Statement Sales Gain on Bond Retirement Less: Interest Expense Less: Operating Expenses Income from Brown Corp. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income 400,000 (20,000) (302,200) 22,440 100,240 100,240 30,000 30,000 Brown Corp. 200,000 7,000 (20,000) (150,000) 22,440 22,440 14,960 37,400 7,400 7,400 400 Elimination Entries DR CR Consolidated 600,000 7,000 (40,000) (451,800) 0 115,200 (14,960) 100,240
Statement of Retained Earnings Beginning Balance 146,640 Net Income 100,240 Less: Dividends Declared (40,000) Ending Balance 206,880 Balance Sheet Cash Accounts Receivable Inventory Depreciable Assets (net) Investment in Brown Corp. Bonds Investment in Brown Corp. Stock Total Assets Accounts Payable Bonds Payable Bond Premium Common Stock Retained Earnings NCI in NA of Brown Co. Total Liab. & Equity
50,000 30,000 (10,000) 70,000
50,000 37,400 87,400
7,400 10,000 17,400
146,640 100,240 (40,000) 206,880
68,000 100,000 120,000 360,000 50,000 103,080 801,080 94,200 200,000 300,000 206,880 801,080
55,000 75,000 110,000 210,000 400 10,000 15,600 50,000 450,000 52,000 200,000 28,000 100,000 70,000 450,000 3,360 13,760 106,440 172,040
123,000 175,000 230,000 564,800 0 0 1,092,800 146,200 350,000 21,000 300,000 206,880 68,720 1,092,800
50,000 7,000 100,000 87,400 2,240 246,640
17,400 70,960 88,360
8-36
P8-23 (continued) b. Tyler Manufacturing and Subsidiary Consolidated Balance Sheet December 31, 20X3 $ 123,000 175,000 230,000 $ 528,000 564,800 $1,092,800 $350,000 21,000 $300,000 206,880 $506,880 68,720 $ 146,200 371,000
Cash Accounts Receivable Inventory Total Current Assets Depreciable Assets (net) Total Assets 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
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 $600,000 7,000 $607,000 (491,800) $115,200 (14,960) $100,240
$ 40,000 451,800
Tyler Manufacturing and Subsidiary Consolidated Statement of Retained Earnings Year Ended December 31, 20X3 Retained Earnings, January 1, 20X3 Income to Controlling Interest, 20X3 Dividends Declared, 20X3 Retained Earnings, December 31, 20X3 $146,640 100,240 $246,880 (40,000) $206,880
8-37
P8-24 Consolidation Worksheet Year after Retirement a.

Book Value Calculations: NCI 40% 68,000 20,000 (4,000) 84,000 + Bennett Corp. 60% 102,000 30,000 (6,000) 126,000 = Common Stock 100,000 + Retained Earnings 70,000 50,000 (10,000) 110,000
100,000
Basic elimination entry Common stock Retained earnings Income from Stone Cont. Co. NCI in NI of Stone Cont. Co. Dividends declared Investment in Stone Cont. Co. NCI in NA of Stone Cont. Co.
100,000 70,000 30,600 20,400 10,000 126,600 84,400
Original amount invested (100%) Beginning balance in retained earnings Bennetts % of NI + Amort. of loss NCI share of NI + Amort. of loss 100% of Stone Cont. Co.'s dividends Net book value + Amort. of loss NCI share of BV + Amort. of loss
Income to Noncontrolling Interest: Reported net income of Stone 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 * Stones reported interest expense for $100,000 bonds
Bennetts reported interest income Difference (amortization of premium) Total premium Yearly amortization Years:
$50,000 $106,000 100,000) $ 6,000 6* 1,000 $51,000 x 0.40 $20,400

$9,000 8,000 $1,000 6,000 1,000 6 years
8-38
8-39
P8-24 (continued)
Bond Elimination Entry: Bonds Payable Investment in Stone Cont. Stock. NCI in NA of Stone Cont. Co. Interest Income Investment in Stone Cont. Bonds Interest Expense
100,000 4,200 2,800 8,000 106,000 9,000
Bennett Corp. Income Statement Sales Interest Income Less: Interest Expense Less: Other Expenses Income from Stone Cont. Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Accounts Receivable Inventory Other Assets Investment in Stone Cont. Co. Bonds Investment in Stone Cont. Co. Stock Total Assets Accounts Payable Bonds Payable Common Stock Retained Earnings NCI in NA of Stone Cont. Co. Total Liabilities & Equity 450,000 8,000 (20,000) (368,600) 30,600 100,000 100,000
Stone Cont. Co. 250,000
Elimination Entries DR 8,000 CR Consolidated 700,000 0 (29,000) (550,600) 0 120,400 (20,400) 100,000
(18,000) (182,000) 50,000 50,000 30,600 38,600 20,400 59,000
9,000 9,000 9,000
210,000 100,000 (40,000) 270,000
70,000 50,000 (10,000) 110,000
70,000 59,000 129,000
9,000 10,000 19,000
210,000 100,000 (40,000) 270,000
61,600 100,000 120,000 340,000 106,000 122,400 850,000 80,000 200,000 300,000 270,000 850,000
20,000 80,000 110,000 250,000 106,00 0 126,60 0 232,60 0
81,600 180,000 230,000 590,000 0 0 1,081,600 130,000 300,000 300,000 270,000 81,600 1,081,600
4,200 460,000 50,000 200,000 100,000 110,000 460,000 4,200
100,000 100,000 129,000 2,800 331,800
19,000 84,400 103,40 0
8-40
P8-24 (continued) b. Bennett Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X4 $ 81,600 180,000 230,000 $ 491,600 590,000 $1,081,600 $ 130,000 300,000 $300,000 270,000 $570,000 81,600
Cash Accounts Receivable Inventory Total Current Assets Other Assets Total Asset 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
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 Dividends Declared, 20X4 Retained Earnings, December 31, 20X4 $210,000 100,000 $310,000 (40,000) $270,000
8-41
P8-25 Intercorporate Inventory and Debt Transfers a. 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 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. Entry to record interest expense for Avery Company: Interest Expense Bond Premium Cash 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 15,200 800 $167,000 120,000 $287,000 (9,000) $278,000 $620,000 240,000 (15,000) $40,000 33,000 $73,000 (22,000) (51,000) $794,000
b.
16,000 $200,000 x 0.08 $ 16,000 (800) $ 15,200
8-42
P8-25 (continued) d. Entry to record interest income for Lance Corporation: Cash Investment in Avery Company Bonds Interest Income Computation of interest income Annual payment received ($80,000 x 0.08) Amortization of discount [($80,000 - $78,400) / 8 years] Interest income for 20X7 e. Amount assigned to the noncontrolling interest Averys Common Stock Averys Beginning RE Averys Net Income Averys Dividends Constructive Gain 2 Years Amortization of Constructive Gain Total Proportion of ownership held by noncontrolling interest 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 $200,000 6,400 200
6,600 $6,400 200 $6,600 $50,000 170,000 48,000 (24,000) 4,160 (1,040) $247,120 x 0.25 $61,780 $48,000 15,000 (520) $62,480 x 0.25 $15,620
6,400 $206,400 x 0.40 $ 82,560 (78,400) $ 4,160
8-43
P8-25 (continued)
f.
Book Value Calculations: NCI 25% 55,000 12,000 (6,000) 61,000 + Lance Corp. 75% 165,000 36,000 (18,000) 183,000 = Common Stock 50,000 50,000 + Retained Earnings 170,000 48,000 (24,000) 194,000
Reversal/Deferred GP Calculations: Upstream Reversal Downstream Deferred GP Amortization of Constructive Gain Total Total 15,000 (9,000) (520) 5,480 = Lance Corp.'s share 11,250 (9,000) (390) 1,860 + NCI's share 3,750 (130) 3,620
Basic elimination entry Common stock Retained earnings Income from Avery Co. NCI in NI of Avery Co. Dividends declared Investment in Avery Co. NCI in NA of Avery Co. 20X6 Upstream Transactions Beginning Inventory Sales 59,000 COGS 44,000 Gross Profit 15,000 Reversal of last year's deferral: Investment in Avery Co. NCI in NA of Avery Co. Cost of Goods Sold
50,000 170,000 37,860 15,620 24,000 184,860 64,620
Original amount invested (100%) Beginning balance in retained earnings Lance Corp.s % of NI + GP Reversal - Def. GP - Amort of Const. Gain NCI share of NI + GP Reversal - Amort of Const. Gain 100% of Avery Co.'s dividends declared Net book value + GP Reversal - Def. GP - Amort of Const. Gain NCI share of BV + GP Reversal - Amort of Const. Gain
11,250 3,750 15,000
8-44
P8-25 (continued)
20X7 Downstream Transactions Sales COGS Gross Profit Gross Profit % Total 60,000 40,000 20,000 33.33% = Re-sold 33,000 22,000 11,000 + Ending Inventory 27,000 18,000 9,000
Deferral of this year's unrealized profits on inventory transfers Sales 60,000 Cost of Goods Sold 51,000 Inventory 9,000 Bond Elimination Entry: Bonds Payable Bond Premium Interest Income Investment in Avery Co. Bonds Interest Expense Investment in Avery Co. Stock NCI in NA of Avery Co.
80,000 1,920 6,600 78,800 6,080 2,730 910
$1,920 = ($3,200 / 10 years) x 6 years $6,600 = ($80,000 x 0.08) + ($1,600 / 8 years) $78,800 = $78,400 + [($1,600 / 8 years) x 2 years] $6,080 = ($80,000 x 0.08) - ($3,200 / 10 years) $2,730 = ($4,160 - $520) x 0.75 $910 = ($4,160 - $520) x 0.25
8-45
P8-25 (continued) g.
Lance Corp. Income Statement Sales Interest and Other Income Less: COGS Less: Depreciation Expense Less: Interest and Other Expenses Income from Avery Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Accounts Receivable Other Receivables Inventory Land Buildings & Equipment Less: Accumulated Depreciation Investment in Avery Co. Bonds Investment in Avery Co. Stock Total Assets Accounts Payable Other Payables Bonds Payable Bond Premium Common Stock Additional Paid-in Capital Retained Earnings NCI in NA of Avery Co. Total Liabilities & Equity 283,180 103,860 (50,000) 337,040 170,000 48,000 (24,000) 194,000 170,00 0 120,08 0 290,08 0 283,180 72,080 24,000 96,080 103,860 (50,000) 337,040 750,000 16,000 (620,000) (45,000) (35,000) 37,860 103,860 103,860 Avery Co. 320,000 5,000 (240,000 ) (15,000) (22,000) 48,000 48,000 37,860 104,46 0 15,620 120,08 0 Elimination Entries DR CR 60,000 6,600 15,000 51,000 6,080 72,080 72,080 Consolidated 1,010,000 14,400 (794,000) (60,000) (50,920) 0 119,480 (15,620) 103,860
37,900 110,000 30,000 167,000 90,000 500,000 (155,000) 78,800 176,340 1,035,04 0 118,000 40,000 250,000 250,000 40,000 337,040 1,035,04 0
48,800 105,000 15,000 120,000 40,000 250,000 (75,000) 11,250 503,800 35,000 20,000 200,000 4,800 50,000 194,000 0
9,000
78,800 184,86 0 2,730 9,000
86,700 215,000 45,000 278,000 130,000 750,000 (230,000) 0 0 1,274,700 153,000 60,000 370,000 2,880 250,000 40,000
80,000 1,920 50,000 290,08 0 3,750 422,00 0 96,080 64,620 910 160,70 0
337,040 61,780 1,274,700
503,800
8-46
P8-26 Intercorporate Bond Holdings and Other Transfers a.

Book Value Calculations: NCI 25% 50,000 7,500 (2,500) 55,000 + Pond Corp. 75% 150,000 22,500 (7,500) 165,000 = Common Stock 50,000 50,000 + Retained Earnings 150,000 30,000 (10,000) 170,000
Reversal/Deferred GP Calculations: Downstream Extra Depreciation Amortization of Constr. Loss Total Basic elimination entry Common stock Additional Paid-in Capital Retained earnings Income from Skate Co. NCI in NI of Skate Co. Dividends declared Investment in Skate Co. NCI in NA of Skate Co. Total 1,500 600 2,100 = Pond Corp.'s share 1,500 450 1,950 + NCI's share 150 150
30,000 20,000 150,000 24,450 7,650 10,000 166,950 55,150
Original amount invested (100%) Original amount invested (100%) Beginning balance in retained earnings Pond Corp.s % of NI + Extra Depr. + Amort. of Constr. Loss NCI share of NI + Amort. of Constr. Loss 100% of Skate Co.'s dividends declared Net book value + Extra Depr. + Amort. of Constr. Loss NCI share of BV + Amort. of Constr. Loss
Skate Co. Pond Corp.
Building 65,000 60,000 125,000
Actual As if
Accumulated Depreciation 6,500 1,500 75,000 80,000
Eliminate the gain on building and correct asset's basis:

Investment in Skate Co. Building Accumulated Depreciation Accumulated Depreciation Depreciation Expense Eliminate the gain on land: Investment in Skate Co. NCI in NA of Skate Co. 15,000 60,000 75,000
1,500 1,500
9,750 3,250
8-47
Land
13,000
8-48
P8-26 (continued)
Bond Elimination Entry: Bonds Payable 40,000 Interest Income 3,600 Investment in Skate Co. Stock 3,150 NCI in NA of Skate co. 1,050 Investment in Skate Co. Bonds Interest Expense Bond Discount Debt Elimination Entry: Interest Payable Interest Receivable
42,400 4,200 1,200
2,000 2,000
P8-26 (continued) b.
Pond Corp. Income Statement Sales Interest Income Less: COGS Less: Depreciation Expense Less: Other Operating Expenses Less: Interest Expense Less: Miscellaneous Expense Income from Skate Co. Consolidated Net Income NCI in Net Income Controlling Interest in NI Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Accounts Receivable Interest and Other Receivables Inventory Land Buildings & Equipment Less: Accumulated Depreciation Investment in Skate Co. Stock Investment in Skate Co. Bonds Investment in Tin Co. Bonds Total Assets Accounts Payable Interest and Other Payables Bonds Payable Bond Discount Common Stock Additional Paid-in Capital Retained Earnings NCI in NA of Skate Co. Total Liabilities & Equity 450,000 18,500 (285,000 ) (35,000) (50,000) (24,000) (11,900) 24,450 87,050 87,050 Skate Co. 250,000 3,600 (136,000 ) (24,000) (40,000) (10,500) (9,500) 30,000 30,000 24,450 28,050 7,650 35,700 1,500 4,200 5,700 5,700 Elimination Entries DR CR Consolidated 700,000 14,900 (421,000) (57,500) (90,000) (30,300) (21,400) 0 94,700 (7,650) 87,050
222,500 87,050 (30,000) 279,550
150,000 30,000 (10,000) 170,000
150,000 35,700 185,700
5,700 10,000 15,700
222,500 87,050 (30,000) 279,550
53,100 176,000 45,000 140,000 50,000 400,000 (185,000 ) 139,050
47,000 65,000 10,000 50,000 22,000 240,000 (94,000) 2,000 13,000 60,000 1,500 15,000 9,750 3,150 75,000 166,95 0
100,100 241,000 53,000 190,000 59,000 700,000 (352,500) 0
42,400 134,000 994,550 65,000 45,000 300,000 150,000 155,000 279,550 994,550 340,000 11,000 12,000 100,000 (3,000) 30,000 20,000 170,000 340,000 89,400
42,400 299,35 0
0 134,000 1,124,600 76,000 55,000 360,000 (1,800) 150,000 155,000 279,550 50,850 1,124,600
2,000 40,000 1,200 30,000 20,000 185,700 3,250 1,050 282,000 15,700 55,150 72,050
P8-27A Comprehensive Multiple-Choice Questions (Modified Equity Method) 1. 2. 3. 4. 5. 6. 7. b b a b b d b $374,000 $294,000 $7,400 $32,000 $13,125 $83,000 $3,000 [$200,000 + $180,000 - .30($70,000 - $50,000)] [$220,000 + $140,000 - $2,000 - ($70,000 - $6,000)] [($100,000 x 0.09) - ($6,400 premium / 4 years)] [$24,000 + ($16,000 / 2)] ($293,125 - $200,000 - $50,000 - $30,000) ($50,000 + $30,000 + $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 0.20 $ 4,620 $200,000 125,000 (6,000) (2,400) 21,000 5,625 $343,225 x 0.20 $ 68,645
P8-28 Comprehensive Problem: Intercorporate Transfers a. Goodwill as of January 1, 20X7: Fair value of consideration given by Topp Fair value of noncontrolling interest at acquisition Total Book value of net assets at acquisition Differential at acquisition Increase in fair value of land Goodwill at acquisition b. 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 0.90) Inventory sale deferred gross profit ($4,500 x 0.90) Balance in Investment in Bussman Stock account, January 1, 20X7 Working backwards: Ending Balance - Net Income ($100,000 x 0.90) + Dividends ($40,000 x 0.90) - Reversal of 20X6 deferred gross profit ($4,500 x 0.90) + 20X7 gross profit deferral ($5,400 x 0.90) + Impairment loss ($25,000 x 0.90) - Bond retirement gain ($24,000 x 0.90) + Retirement gain amortization ($6,000 x 0.90) Total c. 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 $ 500,000 280,000 470,000 $1,250,000 x 0.90 $1,125,000 72,000 (4,050) $1,192,950 $1,239,840 (90,000) 36,000 (4,050) 4,860 22,500 (21,600) 5,400 $ 1,192,950 $1,152,000 128,000 $1,280,000 (1,200,000) $ 80,000 (30,000) $ 50,000
d.
Income to noncontrolling interest, 20X7: Bussman's 20X7 net income Add: 20X6 intercompany profit realized in 20X7 Constructive gain on retirement of bonds Less: Unrealized intercompany profit on 20X7 transfer Portion of constructive gain on bond retirement recognized currently by separate affiliates ($24,000 / 4 years) Impairment of goodwill Subsidiary income to be apportioned Noncontrolling interest's proportionate share Income to noncontrolling interest $100,000 4,500 24,000 (5,400) (6,000) (25,000) $ 92,100 x 0.10 $ 9,210
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 Noncontrolling interest's proportionate share Total noncontrolling interest, December 31, 20X6 $1,250,000 (4,500) $1,245,500 30,000 50,000 $1,325,500 x 0.10 $ 132,550
P8-28 (continued) f. elimination entries

Book Value Calculations: NCI 10% Original Book Value + Net Income - Dividends Ending Book Value 125,000 10,000 (4,000) 131,000 + Topp Co. 90% 1,125,000 90,000 (36,000) 1,179,000 = Common Stock 500,000 500,000 + Premium on Common Stock 280,000 280,000 + Retained Earnings 470,000 100,000 (40,000) 530,000
Deferred Gain Calculations: Inventory 20X6 Reversal Inventory 20X7 Def. GP Bond Retirement Gain Amortization of Retirement Gain Total Basic elimination entry: Common Stock Premium on Common Stock Retained Earnings Income from Bussman Corp. NCI in NI of Bussman Corp. Dividends declared Investment in Bussman Corp. NCI in NA of Bussman Corp. Total 4,500 (5,400) 24,000 (6,000) 17,100 = Topp Co.'s Share 4,050 (4,860) 21,600 (5,400) 15,390 + NCI's share 450 (540) 2,400 (600) 1,710
500,000 280,000 470,000 105,390 11,710 40,000 1,194,390 132,710
Original amount invested (100%) Beginning balance in premium on common stock Beginning balance in retained earnings Topp's % of NI - Deferred GP + Reversal + Gain - Amort of Gain NCI share of NI - Deferred GP + Reversal + Gain - Amort of Gain 100% of Bussman Corp.'s dividends declared Net book value - Deferred GP + Reversal + Gain - Amort of Gain NCI share of BV - Deferred GP + Reversal + Gain - Amort of Gain
Excess Value (Differential) Calculations: Beginning balance Changes Ending balance NCI 10% 8,000 (2,500) 5,500 + Topp Co. 90% 72,000 (22,500) 49,500 = Land 30,000 30,000 + Goodwill 50,000 (25,000) 25,000
Amortized excess value reclassification entry: Goodwill Impairment Loss 25,000 Income from Bussman Corp. NCI in NI of Bussman Corp.
22,500 2,500
Excess value (differential) reclassification entry: Land 30,000 Goodwill 25,000 Investment in Bussman Corp. 49,500 NCI in NA of Bussman Corp. 5,500
P8-28 (continued)
20X6 Upstream Transactions Total = Sales 64,000 COGS 44,800 Gross Profit 19,200 Gross Profit % 30.00% 20X7 Upstream Transactions Total = Sales 78,000 COGS 54,600 Gross Profit 23,400 Gross Profit % 30.00% Reversal of last year's deferral: Investment in Bussman Corp. NCI in NA of Bussman Corp. Cost of Goods Sold Re-sold 49,000 34,300 14,700 + Ending Inventory 15,000 10,500 4,500
Re-sold 60,000 42,000 18,000
Ending Inventory 18,000 12,600 5,400
4,050 450 4,500
Deferral of 20X7 unrealized profits on inventory transfers Sales 78,000 Cost of Goods Sold 72,600 Inventory 5,400 Eliminate intercompany of Topp's bonds: Bonds Payable 200,000 Investment in Topp Bonds Eliminate intercompany interest Other Income Other Expenses ($200,000 x 0.10)
200,000
20,000 20,000
Eliminate accrued interest on intercompany bonds: Current Payables 5,000 Current Receivables ($200,000 x 0.10) x 1/4 year
5,000
Eliminate intercompany holding of Bussman bonds: Bonds Payable 1,000,000 Premium on Bonds Payable 3,000 Other Income (Interest) 125,000 Investment in Bussman Bonds 985,000 Gain on Retirement of Bonds 24,000 Other Expenses (Interest) 119,000 $125,000 = ($1,000,0000 x 0.12) + $5,000 $24,000 = $1,004,000 - $980,000 $119,000 = ($1,000,000 x 0.12) - $1,000
Eliminate intercompany dividend payable/receivable: Current Payables 9,000 Current Receivables 9,000
P8-28 (continued) g.
Topp Income Statement Sales Other Income Less: COGS Less: Depr. and Amort. Expense Less: Other Expenses Goodwill Impairment Loss Gain on Bond Retirement Income from Bussman Corp. Consolidated Net Income NCI in Net Income Controlling Interest in NI Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Current Receivables Inventory Land Buildings & Equipment Less: Accumulated Depreciation Investment in Bussman Corp. Stock Investment in Bussman Corp. Bonds Investment in Topp Bonds Goodwill Total Assets Current Payables Bonds Payable Premium on Bonds Payable Common Stock Premium on Common Stock Retained Earnings 3,101,000 135,000 (2,009,000 ) (195,000) (643,000) Bussman Corp. 790,000 31,000 (430,000) (85,000) (206,000) 25,000 82,890 471,890 471,890 105,390 353,390 11,710 365,100 24,000 22,500 262,600 2,500 265,100 Elimination Entries DR CR 78,000 125,000 20,000 4,500 72,600 119,000 20,000 Consolidated 3,813,000 21,000 (2,361,900) (280,000) (710,000) (25,000) 24,000 0 481,100 (9,210) 471,890
100,000 100,000
3,028,950 471,890 (50,000) 3,450,840
470,000 100,000 (40,000) 530,000
470,000 365,100 835,100
265,100 40,000 305,100
3,028,950 471,890 (50,000) 3,450,840
39,500 112,500 301,000 1,231,000 2,750,000 (1,210,000 ) 1,239,840 985,000
29,000 85,100 348,900 513,000 1,835,000 (619,000) 4,050 30,000
5,000 9,000 5,400
68,500 183,600 644,500 1,774,000 4,585,000 (1,829,000)
1,194,39 0 49,500 985,000 200,000
0 0 0 25,000 5,451,600 163,000 0 1,000,000 700,000 3,450,840
200,000 25,000 5,448,840 98,000 200,000 1,000,000 700,000 3,450,840 2,392,000 79,000 1,000,000 3,000 500,000 280,000 530,000 59,050 5,000 9,000 1,000,00 0 200,000 3,000 500,000 280,000 835,100
2,448,29 0
305,100

NCI in NA of Bussman Corp. Total Liabilities & Equity 5,448,840 2,392,000 450 2,832,55 0 132,710 5,500 443,310 137,760 5,451,600
P8-29A Comprehensive Problem: Intercorporate Transfers (Modified Equity Method) 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. 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 0.90) Balance in Investment in Bussman Stock account, January 1, 20X7 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 0.90) Balance in Investment in Bussman Stock account, December 31, 20X7 c. 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 $1,197,000 90,000 (36,000) $1,251,000 $ 500,000 280,000 470,000 $1,250,000 x 0.90 $1,125,000 72,000 $1,197,000 $1,152,000 128,000 $1,280,000 (1,200,000) $ 80,000 (30,000) $ 50,000
P8-29A (continued) 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 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 Noncontrolling interest's proportionate share Total noncontrolling interest, December 31, 20X6 $1,250,000 (4,500) $1,245,500 30,000 50,000 $1,325,500 x 0.10 $ 132,550 $100,000 4,500 24,000 (5,400) (6,000) (25,000) $ 92,100 x 0.10 $ 9,210
P8-29A (continued) f. Elimination entries:

Book Value Calculations: NCI 10% Original Book Value + Net Income - Dividends Ending Book Value 125,000 10,000 (4,000) 131,000 + Topp Co. 90% 1,125,000 90,000 (36,000) 1,179,000 = Common Stock 500,000 500,000 + Premium on Common Stock 280,000 280,000 + Retained Earnings 470,000 100,000 (40,000) 530,000
Deferred Gain Calculations: Inventory 20X6 Reversal Inventory 20X7 Def. GP Bond Retirement Gain Amortization of Retirement Gain Total Total 4,500 (5,400) 24,000 (6,000) 17,100 = Topp Co.'s Share 4,050 (4,860) 21,600 (5,400) 15,390 + NCI's share 450 (540) 2,400 (600) 1,710
Basic elimination entry: Common Stock Premium on Common Stock Retained Earnings Income from Bussman Corp. NCI in NI of Bussman Corp. Dividends declared Investment in Bussman Corp. NCI in NA of Bussman Corp.
500,000 280,000 470,000 90,000 11,710 40,000 1,179,000 132,710
Original amount invested (100%) Beginning balance in premium on common stock Beginning balance in retained earnings Topp's % of NI NCI share of NI - Deferred GP + Reversal + Gain - Amort of Gain 100% of Bussman Corp.'s dividends declared Net book value NCI share of BV - Deferred GP + Reversal + Gain - Amort of Gain
Excess value (differential) reclassification entry: Land 30,000 Goodwill 50,000 Investment in Bussman Corp. 72,000 NCI in NA of Bussman Corp. 8,000 Impairment Loss Goodwill Impairment Loss Goodwill NCI's portion of impairment loss NCI in NA of Bussman Corp. NCI in NI of Bussman Corp.
25,000 25,000
2,500 2,500
P8-29A (continued)
20X6 Upstream Transactions Total = Sales 64,000 COGS 44,800 Gross Profit 19,200 Gross Profit % 30.00% 20X7 Upstream Transactions Total = Sales 78,000 COGS 54,600 Gross Profit 23,400 Gross Profit % 30.00% Reversal of last year's deferral: Retained Earnings NCI in NA of Bussman Corp. Cost of Goods Sold Re-sold 49,000 34,300 14,700 + Ending Inventory 15,000 10,500 4,500
Re-sold 60,000 42,000 18,000
Ending Inventory 18,000 12,600 5,400
4,050 450 4,500
Deferral of 20X7 unrealized profits on inventory transfers Sales 78,000 Cost of Goods Sold 72,600 Inventory 5,400 Eliminate intercompany of Topp's bonds: Bonds Payable 200,000 Investment in Topp Bonds Eliminate intercompany interest Other Income Other Expenses ($200,000 x 0.10)
200,000
20,000 20,000
Eliminate accrued interest on intercompany bonds: Current Payables 5,000 Current Receivables 5,000 ($200,000 x 0.10) x 1/4 year Eliminate intercompany holding of Bussman bonds: Bonds Payable 1,000,000 Premium on Bonds Payable 3,000 Other Income (Interest) 125,000 Investment in Bussman Bonds 985,000 Gain on Retirement of Bonds 24,000 Other Expenses (Interest) 119,000 $125,000 = ($1,000,0000 x 0.12) + $5,000 $24,000 = $1,004,000 - $980,000 $119,000 = ($1,000,000 x 0.12) - $1,000 Eliminate intercompany dividend payable/receivable: Current Payables 9,000 Current Receivables 9,000
P8-29A (continued)
Bussman Corp. 790,000 31,000 (430,000) (85,000) (206,000) 25,000 24,000 90,000 479,000 100,000 90,000 338,000 11,710 349,710 240,100 2,500 242,600 Elimination Entries DR CR 78,000 125,000 20,000 4,500 72,600 119,000 20,000
Topp Income Statement Sales Other Income Less: COGS Less: Depr. and Amort. Expense Less: Other Expenses Goodwill Impairment Loss Gain on Bond Retirement Income from Bussman Corp. Consolidated Net Income NCI in Net Income Controlling Interest in NI Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Current Receivables Inventory Land Buildings & Equipment Less: Accumulated Depreciation Investment in Bussman Corp. Stock Investment in Bussman Corp. Bonds Investment in Topp Bonds Goodwill Total Assets Current Payables Bonds Payable Premium on Bonds Payable Common Stock Premium on Common Stock Retained Earnings NCI in NA of Bussman Corp. 3,101,000 135,000 (2,009,000 ) (195,000) (643,000)
Consolidated 3,813,000 21,000 (2,361,900) (280,000) (710,000) (25,000) 24,000 0 481,100 (9,210) 471,890
479,000
100,000
3,033,000 479,000 (50,000) 3,462,000
470,000 100,000 (40,000) 530,000
470,000 4,050 349,710 823,760
3,028,950 242,600 40,000 282,600 471,890 (50,000) 3,450,840
39,500 112,500 301,000 1,231,000 2,750,000 (1,210,000 ) 1,251,000 985,000
29,000 85,100 348,900 513,000 1,835,000 (619,000) 30,000
5,000 9,000 5,400
68,500 183,600 644,500 1,774,000 4,585,000 (1,829,000)
1,179,00 0 72,000 200,000 50,000 985,000 200,000 25,000 2,480,40 0
0 0 0 25,000 5,451,600 163,000 0 1,000,000 700,000 3,450,840 137,760
5,460,000 98,000 200,000 1,000,000 700,000 3,462,000
2,392,000 79,000 1,000,000 3,000 500,000 280,000 530,000
80,000 5,000 9,000 1,000,00 0 200,000 3,000 500,000 280,000 823,760 450
282,600 132,710

2,500 2,823,71 0 8,000 423,310 5,451,600
Total Liabilities & Equity
5,460,000
2,392,000
P8-30A Cost Method (This problem was incorrectly listed as P8-29A) a. Journal entry recorded by Bennet Corporation: Cash 6,000 Dividend Income 6,000 Record dividend from Stone Container: $10,000 x 0.60
b. Eliminating entries, December 31, 20X4:

Basic elimination entry Common stock Retained earnings Investment in Stone Cont. Co. NCI in NA of Stone Cont. Co. Dividend elimination entry: Dividend Income NCI in NI of Stone Cont. Co. Dividend declared Assign undistributed income to NCI NCI in NI of Stone Cont. Co. Retained Earnings NCI in NA of Stone Cont. Co. 100,000 25,000 75,000 50,000
6,000 4,000 10,000
16,400 18,000 34,400
Bond Elimination Entry: Bonds Payable 100,000 Retained Earnings 4,200 NCI in NA of Stone Cont. Co. 2,800 Interest Income 8,000 Investment in Stone Cont. Bonds Interest Expense
106,000 9,000
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
P8-29A (continued) c.
Bennett Corp. Income Statement Sales Interest Income Less: Interest Expense Less: Other Expenses Dividend Income Consolidated Net Income NCI in Net Income Controlling Interest in NI 450,000 8,000 (20,000) (368,600) 6,000 75,400 75,400 Stone Cont. Co. 250,000 8,000 (18,000) (182,000) 50,000 50,000 6,000 14,000 4,000 16,400 34,400 9,000 9,000 9,000 Elimination Entries DR CR Consolidated 700,000 0 (29,000) (550,600) 0 120,400 (20,400) 100,000
Statement of Retained Earnings Beginning Balance 187,200 Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Accounts Receivable Inventory Other Assets Investment in Stone Bonds Investment in Stone Stock Total Assets Accounts Payable Bonds Payable Common Stock Retained Earnings NCI in NA of Stone Cont. Total Liabilities & Equity 75,400 (40,000) 222,600
70,000 50,000 (10,000) 110,000
25,000 18,000 4,200 34,400 81,600
210,000 9,000 10,000 19,000 100,000 (40,000) 270,000
61,600 100,000 120,000 340,000 106,000 75,000 802,600 80,000 200,000 300,000 222,600 802,600
20,000 80,000 110,000 250,000 460,000 50,000 200,000 100,000 110,000 460,000 0 106,000 75,000 181,000
81,600 180,000 230,000 590,000 0 0 1,081,600 130,000 300,000 300,000 270,000 81,600 1,081,600
100,000 100,000 81,600 2,800 284,400
19,000 50,000 34,400 103,400

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Chap 008

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Chapter 08 - Intercompany Indebtedness

Chapter 08 - Intercompany Indebtedness

Chapter 08 - Intercompany Indebtedness

Chapter 08 - Intercompany Indebtedness

Chapter 08 - Intercompany Indebtedness

Chapter 08 - Intercompany Indebtedness

Chapter 08 - Intercompany Indebtedness

Chapter 08 - Intercompany Indebtedness

150,000 5,400 8,400

Chapter 08 - Intercompany Indebtedness

103,500 11,500 6,000

395,200 4,800 33,600

Chapter 08 - Intercompany Indebtedness

Chapter 08 - Intercompany Indebtedness

397,200 35,400 7,200 4,800

Chapter 08 - Intercompany Indebtedness

Chapter 08 - Intercompany Indebtedness

397,200 35,400 7,200 4,800 18,000

Chapter 08 - Intercompany Indebtedness

297,120 21,450 5,400

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

Chapter 08 - Intercompany Indebtedness

100,000 3,000 7,000 6,000

Chapter 08 - Intercompany Indebtedness

192,800 10,600 13,000

Chapter 08 - Intercompany Indebtedness

194,000 21,200 8,400 3,600

(2,000) $ 48,000 x .30 $ 14,400

Chapter 08 - Intercompany Indebtedness

200 $ 18,800 x 0.35 $ 6,580

Chapter 08 - Intercompany Indebtedness

Chapter 08 - Intercompany Indebtedness

Original book value + Net Income - Dividends Ending book value

100,000 50,000 18,000 12,000 10,000 102,000 68,000

80,000 1,200 6,000 81,200 6,000

Chapter 08 - Intercompany Indebtedness

230,000 87,200 (40,000) 277,200

50,000 30,000 (10,000) 70,000

50,000 36,000 86,000

6,000 10,000 16,000

230,000 87,200 (40,000) 277,200

40,000 65,000 300,000 (75,000) 81,200 81,200 102,00 0 183,20 0

411,200 41,200 200,000 100,000 70,000 411,200

80,000 1,200 100,00 0 86,000 267,20 0

16,000 68,000 84,000

Chapter 08 - Intercompany Indebtedness

Original book value + Net Income - Dividends Ending book value

Chapter 08 - Intercompany Indebtedness

242,000 45,700 (30,000) 257,700

50,000 25,000 (20,000) 55,000

50,000 30,200 80,200

5,200 20,000 25,200

242,000 45,700 (30,000) 257,700

36,600 75,000 240,000 (80,000) 101,60 0 121,50 0 223,10 0

58,600 240,000 640,000 (220,000)

271,600 35,000 100,000 1,600 80,000 55,000 271,600

100,00 0 1,600 80,000 80,200 261,80 0

200,000 25,200 13,500 38,700 120,000 257,700 13,500 718,600

Chapter 08 - Intercompany Indebtedness

Chapter 08 - Intercompany Indebtedness

Acc. Depr. (8,000) (4,000) (12,000)

4,000 2,800 1,200

56,000 12,000 30,800 13,200

5,600 2,400 8,000