Chap 008

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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
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Q8-7 When there has been a direct sale to an affiliate, the interest income recorded by the
purchaser should equal the interest expense recorded by the seller and the two items should
have no net effect on reported income. The eliminating entries do not change consolidated
net income in this case, but they will result in a more appropriate statement of the relevant
income and expense categories in the consolidated income statement.
Q8-8 Whenever a loss on bond retirement has been reported in a prior period, the affiliate
that purchased the bonds paid more than the book value of the debt shown by the debtor. As
a result, each period the interest income recorded by the buyer will be less than the interest
expense reported by the debtor. When the two income statement accounts are eliminated in
the consolidation process, the effect will be to increase consolidated net income. Because
the full amount of the loss was recognized for consolidated purposes in the year in which the
bonds were purchased by the affiliate, the effect of the elimination process in each of the
periods that follow should be to increase consolidated income.
Q8-9 The difference between the carrying value of the debt on the debtor's books and the
carrying value of the investment on the purchaser's books indicates the amount of
unrecognized gain or loss at the end of the period. To determine the amount of the gain or
loss on retirement at the start of the period, the difference between interest income recorded
by the purchaser on the bond that has been purchased and interest expense recorded by the
debtor during the period is added to the difference between carrying values at the end of the
period.
Q8-10 Interest income and interest expense must be eliminated and a loss on bond
retirement established in the elimination process. Consolidated net income will decrease by
the amount of the loss. Because the loss is attributed to the subsidiary, income assigned to
the controlling and noncontrolling interests will decrease in proportion to their share of
common stock held.
Q8-11 A constructive gain will be included in the consolidated income statement in this case
and both consolidated net income and income to the controlling interest will increase by the
full amount of the gain.
Q8-12 A direct placement of subsidiary bonds with the parent should have no effect on
consolidated income or on income assigned to the noncontrolling shareholders.
Q8-13 When subsidiary bonds are purchased from a nonaffiliate by the parent and there is a
constructive gain or loss for consolidated purposes, the gain or loss is assigned to the
subsidiary and included in computing income to the noncontrolling shareholders.
Q8-14 Interest income recorded by the subsidiary and interest expense recorded by the
parent should be equal in the direct placement case. When the subsidiary purchases parent
company bonds from a nonaffiliate, interest income and interest expense will not be the
same unless the bonds are purchased from the nonaffiliate at an amount equal to the liability
reported by the parent.
8-2
Q8-15 A gain on constructive bond retirement recorded in a prior period means the bonds
were purchased for less than book value and the interest income recorded by the subsidiary
each period will be greater than the interest expense recorded by the parent. Consolidated
net income for the current period will decrease by the difference between interest income
and interest expense as these amounts are eliminated in preparing the consolidated
statements. Income to the noncontrolling interest will be unaffected since the constructive
gain is assigned to parent company.
Q8-16 A constructive loss recorded on the subsidiary's bonds in a prior period means the
interest income recorded by the parent is less than the interest expense recorded by the
subsidiary in each of the following periods. Consolidated net income will increase when
interest income and expense are eliminated. Income assigned to the noncontrolling interest
will be based on the reported net income of the subsidiary plus the difference between
interest income and interest expense each period following the retirement. As a result, the
amount assigned will be greater than if the bond had not been constructively retired.
Q8-17 On the date the parent sells the bonds to a nonaffiliate they are issued for the first
time from a consolidated perspective. While the parent will record a gain or loss on sale of
the bonds on its books, none is recognized from a consolidated viewpoint. The difference
between the sale price received by the parent and par value is a premium or discount. Each
period there will be a need to establish the correct amount for the premium or discount
account and to adjust interest expense recorded by the subsidiary to bring the reported
amounts into conformity with the sale price to the nonaffiliate.
Q8-18 The retirement gain or loss reported by the subsidiary when it repurchases the bonds
held by the parent must be eliminated in the consolidation process. From the viewpoint of the
consolidated entity the bonds were retired at the point they were purchased by the parent
and a gain or loss should have been recognized at that point.
8-3
SOLUTIONS TO CASES
C8-1 Recognition of Retirement Gains and Losses
a. When Flood purchases the bonds it establishes an investment account on its books and
Bradley establishes a bond liability and discount account on its books. No entry is made by
Century. When Century purchases the bonds, Century records an investment and Flood
removes the balance in the investment account and records a gain on the sale. Bradley
makes no entry. When Bradley retires the issue, Bradley removes its liability and
unamortized discount and records a loss on bond retirement. Century removes the bond
investment account and records a loss on the sale of bonds. Flood makes no entry.
b. A constructive loss on bond retirement is reported by the consolidated entity at the time
Century purchases the bonds from Flood. The exact amount of the loss cannot be
ascertained without knowing the maturity date of the bonds, the date of initial sale, and the
date of purchase by Century.
c. The initial sale of bonds by Bradley is treated as a normal transaction with no need for an
adjustment to income assigned to the noncontrolling shareholders. Income assigned to
noncontrolling shareholders will be reduced by a proportionate share of the loss reported in
the consolidated income statement in the period in which Century purchases the bonds from
Flood. In the years before the bonds are retired by Bradley, income assigned to the
noncontrolling interest (assuming no differential) will be greater than a pro rata portion of the
reported net income of Bradley. In the period in which the bonds are retired by Bradley,
reported net income of Bradley must be adjusted to remove its loss on bond retirement
before assigning income to the noncontrolling interest. No adjustment is made in the years
following the repurchase by Bradley.
8-4
C8-2 Borrowing by Variable Interest Entities
MEMO
To: President
Hydro Corporation
From: , Accounting Staff
Re: 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 Hydro’s current reporting is appropriate.
The circumstances surrounding the creation of the joint venture and the lease arrangement
with Hydro appear to point to the need for Hydro to consolidate the joint venture with its own
operations. Although Rich Corner Bank holds 100 percent of the equity of the joint venture, it
has contributed less than 1 percent of the total assets of the joint venture ($200,000 of equity
versus $30,000,000 of total borrowings). Under normal circumstances, less than a 10
percent investment in the entity’s total assets is considered insufficient to permit the entity to
finance its activities. [FASB INT. 46, Par 9]
In this situation, Hydro has guaranteed the $30,000,000 borrowed by the joint venture and
has guaranteed a 20 percent annual return on the equity investment of Rich Corner Bank.
These conditions will result in Hydro Corporation absorbing any losses incurred by the joint
venture and establish Hydro Corporation as the primary beneficiary of the entity. The FASB
requires consolidation by the entity that will absorb a majority of the entity’s expected losses
if they occur. [FASB INT. 46, Par. 14]
Consolidation of the joint venture will result in including the production facility among Hydro’s
assets and the debt as part of its long-term liabilities. The claim on the net assets of the joint
venture held by Rich Corner Bank will be reported as part of noncontrolling interest. Hydro’s
consolidated income statement will not include the lease payment as an operating expense,
but will include depreciation expense on the production facility and interest expense for the
interest payment made on the borrowing of the joint venture.
Primary citation:
FASB INT. 46
8-5
Case 8-3 Subsidiary Bond Holdings
MEMO
To: Financial Vice-President

Farflung Corporation
From: , Accounting Staff
Re: 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 400,000

Loss on Bond Retirement 24,000
Investment in Micro Company Bonds 424,000
The $24,000 loss should have been included in the consolidated income statement, leading
to a reduction of $15,600 ($24,000 x .65) in income assigned to the controlling interest and a
reduction of $8,400 ($24,000 x .35) in income assigned to noncontrolling shareholders. This
error should be corrected by restating the financial statements of the consolidated entity for
20X4.
While omission of the eliminating entry resulted in incorrect financial statements for the
consolidated entity, it should have no impact on the financial statements of the individual
subsidiaries. Assuming (1) the bonds had 15 years remaining until maturity when purchased
by Eagle and pay 8 percent interest annually, (2) straight-line amortization of the premium
paid by Eagle is appropriate, and (3) the consolidated financial statements as of December
31, 20X4, are corrected, the eliminating entry at December 31, 20X5, is:
8-6
C8-3 (continued)

Interest Income 30,400(a)
Retained Earnings 15,600
Noncontrolling Interest 8,400
Investment in Micro Company Bonds 422,400(b)
Interest Expense 32,000(c)
(a) ($400,000 x .08) - ($24,000/15 years)

(b) $424,000 - ($24,000/15 years)
(c) $400,000 x .08
Primary citation:
ARB 51, Par. 6
C8-4 Interest Income and Expense
a. Snerd apparently paid more than par value for the bonds and is amortizing the premium
against interest income over the life of the bonds. Thus, the cash received is greater than the
amount of interest income recorded.
b. With the information given, the following appears to be true:
(1) When purchasing the bonds, Snerd apparently paid less than the current carrying
amount of the bonds on the subsidiary’s books because a constructive gain on bond
retirement is included in the 20X3 consolidated income statement. Since Snerd paid par
value for the bonds, they must have been sold at a premium by the subsidiary.
(2) Because the bonds were sold at a premium, interest expense recorded by the
subsidiary will be less than the annual interest payment made to the parent.
(3) Interest income recorded each period by Snerd will exceed interest expense
recorded by the subsidiary. When the two balances are eliminated, the effect will be to
reduce income to both the controlling and noncontrolling shareholders.
8-7
C8-5 Intercompany Debt
Answers to this case can be found in the SEC Form 10-K filed by Hershey Foods and its
annual report.
a. When intercompany loans are made between affiliates in different countries, the problem
of changing currency exchange rates may arise, especially if any of the loans are
denominated in a currency that rapidly changes in value against the dollar. Hershey Foods
and many other companies in the same situation hedge their intercompany
receivables/payables through foreign currency forward contracts and swaps.
b. Hershey's intercompany receivables/payables appear to come primarily from

intercompany purchases and sales of goods.
8-8
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 156,000
Cash 156,000
July 1, 20X2
Cash 4,500
Interest Income 4,200
Investment in Lamar Corporation Bonds 300
December 31, 20X2
Interest Receivable 4,500

Investment in Lamar Corporation Bonds 300
b. Journal entries recorded by Lamar Corporation:
January 1, 20X2
Cash 156,000
Bonds Payable 150,000
Bond Premium 6,000
July 1, 20X2
Interest Expense 4,200
Bond Premium 300
Cash 4,500
December 31, 20X2

Bond Premium 300
Interest Payable 4,500
c. Eliminating entries, December 31, 20X2:
E(1) Bonds payable 150,000

Premium on Bonds Payable 5,400
Interest income 8,400
Investment in Lamar Corporation Bonds 155,400
Interest expense 8,400
Eliminate intercorporate bond holdings.
E(2) Interest payable 4,500

Interest receivable 4,500
Eliminate intercompany receivable/payable.
8-9
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:

Bond Premium 3,500
Investment in Nettle Corporation Bonds 103,500
E(2) Interest Payable 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 16,000
July 1, 20X4
Cash 16,000
Investment in Carter Company Bonds 800
$800 = ($400,000 - $392,000)/(5 x 2)
December 31, 20X4

Investment in Carter Company Bonds 800

Investment in Carter Company Bonds 395,200
Bond Discount 4,800
$33,600 = $16,000 + $16,000 + $800 + $800
$395,200 = $392,000 + ($800 x 4)
$4,800 = $8,000 - ($800 x 4)

8-10
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 $40,000

Net income of Gary's Ice Cream Parlors 20,000
$60,000
Less: Loss on bond retirement (5,600)
Recognition during 20X6
($4,700 - $4,000) 700
Consolidated net income $55,100
8-11
E8-6 Multiple-Choice Questions
1. a $14,000 = [($300,000 x .09) - ($60,000 / 10 years)]

x ($200,000 / $300,000)
2. c $12,000 = [$120,000 - ($20,000 / 10 years) x 2 years] - $104,000
3. b Net income of Solar Corporation $30,000

Unrecognized portion of gain
on bond retirement ($12,000 - $1,500) 10,500
$40,500
Proportion of stock held by
noncontrolling interest x .20
Income to noncontrolling interest $ 8,100
E8-7 Constructive Retirement at End of Year
a. Eliminating entries, December 31, 20X5:

Investment in Able Company Bonds 397,000
Gain on Bond Retirement 12,000
$9,000 = [($400,000 x 1.03) - $400,000] x 15/20
$12,000 = $9,000 + $400,000 - $397,000

b. Eliminating entries, December 31, 20X6:

Retained Earnings, January 1 7,200
Noncontrolling Interests 4,800
$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

8-12
E8-8 Constructive Retirement at Beginning of Year

$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)


Noncontrolling Interests 4,800

8-13
E8-9 Retirement of Bonds Sold at a Discount
Elimination of bond investment at December 31, 20X8:

Loss on Constructive Bond Retirement 2,730
Investment in Farley Corporation Bonds 297,120
Discount on Bonds Payable 5,400
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 .97) $291,000

Amortization of discount
[($300,000 - $291,0000) / 20 years] x 7 years 3,150
Book value of liability at January 1, 20X8 $294,150
E8-10 Loss on Constructive Retirement
Eliminating entries, December 31, 20X8:

Investment in Apple Corporation Bonds 106,000

8-14
E8-11 Determining the Amount of Retirement Gain or Loss
a. Par value of bonds outstanding $200,000

Annual interest rate x .12
Interest payment $ 24,000
Amortization of bond premium
($15,000 x 2 bonds) / 5 years (6,000)
Interest charge for full year $ 18,000
Less: Interest on bond purchased by Online Enterprises
[($18,000 x 1/2) x (4 months / 12 months)] (3,000)
Interest expense included in consolidated
income statement $ 15,000
b. Sale price of bonds, January 1, 20X1 $115,000

Amortization of premium [($15,000 / 5) x 2 2/3 years] (8,000)
Book value at time of purchase $107,000
Purchase price (100,000)
Gain on bond retirement $ 7,000

Bond Premium 6,000
Investment in Downlink Bonds 100,000

8-15
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 $200,000
Unamortized premium
$8,000 - [($8,000 / 10 years) x 3.5 years] 5,200
Book value of debt $205,200
Amount paid by Parent (192,200)
c. Consolidated net income for 20X6 will increase by $12,000:

Adjustment for excess of interest income
over interest expense:
Interest income $(11,600)
Interest expense 10,600 (1,000)
Increase in consolidated net income $ 12,000
d. Eliminating entries, December 31, 20X6:

Investment in Bundle Company Bonds 192,800
$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

8-16
E8-12 (continued)
e. Eliminating entries, December 31, 20X7:

Investment in Bundle Company Bonds 194,000
$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

f. Income assigned to noncontrolling interest in 20X7 is $14,400:
Net income reported by Bundle $ 50,000

Interest expense 21,200 (2,000)
Realized net income $ 48,000
Proportion of ownership held x .30
Income assigned to noncontrolling interest $ 14,400
8-17
E8-13 Elimination of Intercorporate Bond Holdings

Constructive Loss on Bond Retirement 1,400
Investment in Stang Corporation Bonds 104,200
$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)

b. Income assigned to noncontrolling interest in 20X8 is $6,580:
Net income reported by Stang Corporation $ 20,000

Constructive loss on bond retirement (1,400)
Adjustment for excess of interest expense
over interest income:
Interest expense $11,500
Interest income (11,300) 200
Realized net income $ 18,800
Proportion of ownership held x .35

Retained Earnings, January 1 780
Noncontrolling Interest 420
Investment in Stang Corporation Bonds 103,500
$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)

8-18
SOLUTIONS TO PROBLEMS
P8-14 Consolidation Workpaper with Sale of Bonds to Subsidiary
a. Entries recorded by Porter on its investment in Temple:
Cash 6,000
Investment in Temple Corporation Stock 6,000
Record dividends from Temple:
$10,000 x .60

Income from Subsidiary 18,000
Record equity-method income:
$30,000 x .60
b. Entry recorded by Porter on its bonds payable:

Bond Premium 400
Cash 6,400
Record interest payment:
$400 = ($82,000 - $80,000) / 5 years
c. Entry recorded by Temple on bond investment:
Cash 6,400
Investment in Porter Company Bonds 400
8-19
P8-14 (continued)
E(1) Income from Subsidiary 18,000

Dividends Declared 6,000
Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest 12,000

Assign income to noncontrolling interest:
$12,000 = $30,000 x .40
E(3) Common Stock — Temple Corporation 100,000

Eliminate beginning investment balance:
$90,000 = $102,000 - $12,000
$60,000 = ($100,000 + $50,000) x .40
E(4) Bonds payable 80,000

Interest income 6,000
Investment in Porter Company Bonds 81,200
Interest expense 6,000
$1,200 = ($82,000 - $80,000) x 3/5
$81,200 = ($82,000 - $800)
8-20
P8-14 (continued)
e. Porter Company and Temple Corporation
Consolidation Workpaper
December 31, 20X2
Porter Temple Eliminations Consol-

Item Co. Corp. Debit Credit idated
Sales 200,000 114,000 314,000
Interest Income 6,000 (4) 6,000
Income from Subsidiary 18,000 (1) 18,000
Credits 218,000 120,000 314,000
Cost of Goods Sold 99,800 61,000 160,800
Depreciation Expense 25,000 15,000 40,000
Interest Expense 6,000 14,000 (4) 6,000 14,000
Debits (130,800) (90,000) (214,800)
Consolidated Net Income 99,200
Income to Noncon-
trolling Interest (2) 12,000 (12,000)
Income, carry forward 87,200 30,000 36,000 6,000 87,200
Retained Earnings, Jan. 1 230,000 50,000 (3) 50,000 230,000
Income, from above 87,200 30,000 36,000 6,000 87,200
317,200 80,000 317,200
Dividends Declared (40,000) (10,000) (1) 6,000
(2) 4,000 (40,000)
Retained Earnings, Dec. 31,
carry forward 277,200 70,000 86,000 16,000 277,200
Cash and Accounts
Receivable 80,200 40,000 120,200
Inventory 120,000 65,000 185,000
Buildings and Equipment 500,000 300,000 800,000
Investment in Temple
Corporation Stock 102,000 (1) 12,000
(3) 90,000
Investment in Porter
Company Bonds 81,200 (4) 81,200
Debits 802,200 486,200 1,105,200
Accum. Depreciation 175,000 75,000 250,000
Accounts Payable 68,800 41,200 110,000
Bonds Payable 80,000 200,000 (4) 80,000 200,000
Bond Premium 1,200 (4) 1,200
Common Stock
Porter Company 200,000 200,000
Temple Corporation 100,000 (3)100,000
Retained Earnings,
from above 277,200 70,000 86,000 16,000 277,200
Noncontrolling
Interest (2) 8,000
(3) 60 000 68,000
Credits 802,200 486,200 267,200 267,200 1,105,200
8-21
P8-15 Consolidation Workpaper with Sale of Bonds to Parent
a. Entries recorded by Mega Corporation on its investment in Tarp Company:
Cash 18,000
Investment in Tarp Company Stock 18,000
Record dividends from Temple:
$20,000 x .90

$25,000 x .90
b. Entry recorded by Mega Corporation on its investment in Tarp Company bonds:
Cash 6,000
Investment in Tarp Company Bonds 800
$800 = ($104,000 - $100,000) / 5 years
c. Entry recorded by Tarp Company on its bonds payable:

Bond Premium 800
Cash 6,000
8-22
P8-15 (continued)


$2,500 = $25,000 x .10
E(3) Common Stock — Tarp Company 80,000

$117,000 = $121,500 - $4,500
$13,000 = ($80,000 + $50,000) x .10

Investment in Tarp Company Bonds 101,600
$1,600 = $4,000 x 2/5
$101,600 = $104,000 - ($4,000 x 3/5)
8-23
P8-15 (continued)
e. Mega Corporation and Tarp Company

December 31, 20X4
Mega Tarp Eliminations Consol-

Item Corp. Co. Debit Credit idated
Sales 140,000 125,000 265,000
Credits 167,700 125,000 265,000
Debits (122,000) (100,000) (216,800)
Income to Noncon-
Retained Earnings, Jan. 1 242,000 50,000 (3) 50,000 242,000
287,700 75,000 287,700
(2) 2,000 (30,000)
Retained Earnings, Dec. 31,
carry forward 257,700 55,000 80,200 25,200 257,700
Cash and Receivables 22,000 36,600 58,600
Inventory 165,000 75,000 240,000
Investment in Tarp
Company Stock 121,500 (1) 4,500
(3)117,000
Investment in Tarp
Company Bonds 101,600 (4)101,600
Debits 810,100 351,600 938,600
Current Payables 92,400 35,000 127,400
Bonds Payable 200,000 100,000 (4)100,000 200,000
Bond Premium 1,600 (4) 1,600
Common Stock
Mega Corporation 120,000 120,000
Tarp Company 80,000 (3) 80,000
Retained Earnings,
from above 257,700 55,000 80,200 25,200 257,700
Noncontrolling
Interest (2) 500
(3) 13,000 13,500
Credits 810,100 351,600 261,800 261,800 938,600
8-24
P8-16 Direct Sale of Bonds to Parent
a. Journal entries recorded by Fern Corporation:
January 1, 20X3
Cash 2,000
Receive interest on bond investment.
July 1, 20X3
Cash 2,000
Investment in Vincent Company Bonds 250
Record receipt of bond interest:
$250 = $5,000 / (10 years x 2)
December 31, 20X3

Cash 7,000
Investment in Vincent Company Stock 7,000
Record dividends for Vincent:
$7,000 = $10,000 x .70
Interest Receivable (Current Receivables) 2,000

Investment in Vincent Company Bonds 250
Accrue interest income at year-end.

$21,000 = $30,000 x .70

Record amortization of differential:
$2,800 = ($56,000 / 14 years) x .70
b. Journal entries recorded by Vincent Company:
January 1, 20X3
Interest Payable 4,000
Cash 4,000
$4,000 = $100,000 x (.08 / 2)
July 1, 20X3
Discount on Bonds Payable 500
Cash 4,000
Semiannual payment of interest:
$500 = $10,000 / 20 semiannual payments
8-25
P8-16 (continued)
December 31, 20X3

Interest Payable (Current Liabilities) 4,000
Accrue interest expense at year-end.
c. Elimination entries, December 31, 20X3:


$7,800 = [$30,000 – ($56,000 / 14 years)] x .30
E(3) Common Stock — Vincent Company 50,000

Differential 48,000
$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)
E(4) Land, Buildings and Equipment (net) 44,000

Operating Expenses 4,000
Differential 48,000
Assign differential and record amortization:
$44,000 = $56,000 – ($4,000 x 3 years)

Investment in Vincent Company Bonds 46,500
$46,500 = $45,000 + ($250 x 6 periods)
$3,500 = $7,000 / 2
E(6) Interest Payable (Current Liabilities) 2,000

Interest Receivable (Current Receivables) 2,000
E(7) Retained Earnings, January 1 5,600

Land, Buildings and Equipment (net) 8,000
Eliminate profit on intercompany sale of land.
8-26
P8-16 (continued)
d. Fern Corporation and Vincent Company

December 31, 20X3
Fern Vincent Eliminations Consol-
Item Corp. Company Debit Credit idated
Sales 300,000 200,000 500,000
Credits 322,700 200,000 500,000
Operating Expenses 198,500 161,000 (4) 4,000 363,500
Debits (225,500) (170,000) (395,000)
Income to Noncon-
Retained Earnings, Jan. 1 244,400 100,000 (3)100,000
(7) 5,600 238,800
341,600 130,000 336,000
(2) 3,000 (60,000)
Ret. Earnings, Dec. 31,
carry forward 281,600 120,000 140,100 14,500 276,000
Cash and Current
Receivables 30,300 46,000 (6) 2,000 74,300
Inventory 170,000 70,000 240,000
Land, Buildings and
Equipment (net) 320,000 180,000 (4) 44,000 (7) 8,000 536,000
Discount on Bonds
Payable 7,000 (5) 3,500 3,500
Investment in Vincent
Company Bonds 46,500 (5) 46,500
Investment in Vincent
Company Stock 149,800 (1) 11,200
(3)138,600
Differential (3) 48,000 (4) 48,000
Debits 716,600 303,000 853,800
Current Liabilities 35,000 33,000 (6) 2,000 66,000
Bonds Payable 300,000 100,000 (5) 50,000 350,000
Common Stock 100,000 50,000 (3) 50,000 100,000
Retained Earnings,
from above 281,600 120,000 140,100 14,500 276,000
Noncontrolling Interest (7) 2,400 (2) 4,800
(3) 59,400 61,800
Credits 716,600 303,000 336,500 336,500 853,800
8-27
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 $198,200
Amortization of discount following purchase
[($200,000 - $198,200) / 3 years] x 2.5 years (1,500)
Purchase price paid by Rupp $196,700
d. A gain of $7,700 was reported:
Book value of liability reported by Gross:
Unamortized premium
$8,000 - [($8,000 / 10 years) x 4.5 years] 4,400
Book value of debt $204,400
Purchase price paid by Rupp (196,700)
e. Consolidated net income for 20X7 after adjustment for bond retirement:
Amount reported without adjustment $ 70,000
Income expense 17,200
(1,400)
Consolidated net income $ 68,600
f. Income assigned to the noncontrolling interest will decrease by $350

($1,400 x .25) as a result of the eliminating entry.
g. Eliminating entry prepared at December 31, 20X8:
Investment in Gross Corporation Bonds 198,800
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
P8-18 Prior Retirement of Bonds
a. Amount paid by Amazing Corporation for bonds:
Reported balance, December 31, 20X6 $102,400

Amortization of premium during 20X6
($2,400 / 6 years) 400
Purchase price $102,800
b. Interest Expense 9,500

Cash 9,000
Annual payment of interest:
$9,500 = [$9,000 + ($3,000 / 6 years)]
c. Cash 9,000
Investment in Broadway Company Bonds 400
Annual receipt of interest:
$8,600 = [$9,000 - ($2,400 / 6 years)]
d. Bonds Payable 100,000

Investment in Broadway Company Bonds 102,800
$6,300 = $102,800 - [$97,000 -
($3,000 / 6 years)]
$102,800 = computed above
$3,500 = [$3,000 + ($3,000 / 6 years)]
e. Consolidated net Income and income to controlling

interest for 20X5 and 20X6:
20X5 20X6
Operating income reported by Amazing $120,000 $150,000
Net income reported by Broadway 60,000 80,000
Loss on bond retirement (6,300)
($9,500) over interest income ($8,600) 900
Consolidated net income $173,700 $230,900
Income to noncontrolling interest:
($60,000 - $6,300) x .15 (8,055)
($80,000 + $900) x .15 (12,135)
Income to controlling interest $165,645 $218,765
8-29
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) $ 9,000
Amount amortized per year ($9,000 / 6 years) 1,500
Premium at date of purchase $ 10,500
Par value 100,000
Purchase price $110,500
b. Carrying amount of liability on date of purchase:
Bond premium, December 31, 20X4 $ 6,000

Amount amortized per year ($6,000 / 6 years) 1,000
Bond premium, January 1, 20X4 $ 7,000
Par value 100,000
Carrying amount of liability, January 1, 20X4 $107,000
c. Income to noncontrolling interest in 20X5:
Reported net income of Condor Company $ 30,000

over interest income recorded in 20X5 500
$ 30,500
Proportion of stock held by noncontrolling interest x .30
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
P8-20 Balance Sheet Eliminations
E(1) Common Stock — Stang Brewing Company 100,000

Investment in Stang Brewing Stock 216,000
Eliminate balance in investment account.
E(2) Retained Earnings 12,000

Inventory 12,000
Eliminate unrealized inventory profit
on downstream sale:
$12,000 = $42,000 - ($42,000 / 1.40)
E(3) Retained Earnings 4,800

Inventory 6,000
Eliminate unrealized inventory profit
on upstream sale:
$6,000 = $26,000 - ($26,000 / 1.30)

Bond Premium 12,000
Investment in Stang Brewing Bonds 101,500
Unrecognized portion of gain at December 31, 20X4:

Bond liability ($300,000 + $36,000) / 3 $112,000
Bond investment (101,500)
Unrecognized portion of gain $ 10,500
Bath Corporation x .80
Gain assigned to Bath Corporation $ 8,400
Gain assigned to noncontrolling
interest (10,500 x .20) $ 2,100
E(5) Interest Payable (Accounts Payable) 4,000

Interest Receivable (Cash and
Receivables) 4,000
8-31
P8-20 (continued)
b. Bath Corporation and Stang Brewing Company

Consolidated Balance Sheet Workpaper
December 31, 20X4
Stang
Bath Brewing Eliminations Consol-
Cash and Receivables 122,500 124,000 (5) 4,000 242,500

Inventory 200,000 150,000 (2) 12,000
(3) 6,000 332,000
Buildings and Equipment
(net) 320,000 360,000 680,000
Investment in:
Stang Brewing Bonds 101,500 (4)101,500
Stang Brewing Stock 216,000 (1)216,000
Total Debits 960,000 634,000 1,254,500
Accounts Payable 40,000 28,000 (5) 4,000 64,000

Bonds Payable 400,000 300,000 (4)100,000 600,000
Bond Premium 36,000 (4) 12,000 24,000
Common Stock 200,000 100,000 (1)100,000 200,000
Retained Earnings 320,000 170,000 (1)170,000 (4) 8,400
(2) 12,000
(3) 4,800 311,600
(4) 2,100 54,900
Total Credits 960,000 634,000 404,000 404,000 1,254,500
8-32
P8-20 (continued)
c. Bath Corporation and Subsidiary

Consolidated Balance Sheet
December 31, 20X4
Cash and Receivables $ 242,500

Inventory 332,000
Buildings and Equipment (net) 680,000
Total Assets $1,254,500
Accounts Payable $ 64,000

Bonds Payable $600,000
Bond Premium 24,000 624,000
Stockholders’ Equity:
Controlling Interest:
Common Stock $200,000
Total Controlling interest $511,600
Total Stockholders’ Equity 566,500
Total Liabilities and Stockholders’ Equity $1,254,500
8-33
P8-21 Computations Relating to Bond Purchase from Nonaffiliate
a. Balance reported, December 31, 20X4 $105,600

Amortization of premium during 20X4:
Annual amortization ($5,600 / 7 years) $800
Portion of year held x .75
Amortized in 20X4 600
Purchase price of bonds $106,200
b. Carrying value of liability at date of acquisition:

Carrying value at year-end $107,000
Premium amortized between date of purchase
and December 31, 20X4 ($1,000 x .75) 750
Carrying value at acquisition $107,750
Gain on constructive retirement $ 1,550

Bond Premium 7,000
Investment in Bliss Company Bonds 105,600
Elimination of interest income:

Interest income at nominal rate
($100,000 x .10) $10,000
Annual amortization of premium by Parsons (800)
Annual interest income recorded by Parsons $ 9,200
Portion of year held by Parsons x .75
Interest income for 20X4 $ 6,900
Elimination of interest expense:

Interest expense at nominal rate
($100,000 x .10) $10,000
Annual amortization of premium by Bliss
($10,000 / 10 years) (1,000)
Annual interest expense recorded by Bliss $ 9,000
Portion of year held by Parsons x .75
Interest expense eliminated $ 6,750

8-34
P8-22 Computations following Parent's Acquisition of Subsidiary Bonds
a. Book value of bonds purchased by Mainstream Corporation:
Balance reported, December 31, 20X5 $111,250

Amortization of premium in 20X4 and 20X5
($11,250 / 3 years) x 2 years 7,500
Balance at date of purchase $118,750
Proportion of bonds purchased by Mainstream x .40
Book value of bonds purchased $47,500
Amount paid by Mainstream to purchase bonds:
Bond investment, December 31, 20X5 $42,400

Amortization of premium in 20X4 and 20X5
($2,400 / 3 years) x 2 years 1,600
b. Bonds Payable 40,000

Bond Premium 4,500
Investment in Offenberg Company Bonds 42,400
$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
c. Retained earnings of Mainstream Corporation $500,000

Unrecognized gain on bond retirement:
Gain at date of repurchase $3,500
Interest differential recognized
[($3,200 - $2,500) x 2 years] (1,400)
Unrecognized balance $2,100
Proportion of stock held by Mainstream x .80
1,680
Consolidated retained earnings $501,680
8-35
P8-23 Consolidation Workpaper — Year of Retirement
a. Elimination Entries (not required):

Investment in Brown Corporation 12,000
Eliminate income from subsidiary:
$18,000 = $30,000 x .60

$14,960 = ($30,000 + $7,000 + $400) x .40
E(3) Common Stock – Brown Corporation 100,000

Investment in Brown Stock 90,000
Eliminate beginning investment balance.

Bond Premium 7,000
Investment in Brown Bonds 50,000
$7,000 = $28,000 / 4

Operating Expenses 400
Depreciable Assets (net) 5,200
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)]
8-36
P8-23 (continued)
Tyler Manufacturing and Brown Corporation

December 31, 20X3
Tyler Brown Eliminations Consol-

Item Mfg. Corp. Debit Credit idated
Sales 400,000 200,000 600,000

Gain on Bond Retirement (4) 7,000 7,000
Credits 418,000 200,000 607,000
Interest Expense 20,000 20,000 40,000
Operating Expenses 302,200 150,000 (5) 400 451,800
Debits (322,200) (170,000) (491,800)
Income to Noncon-
Ret. Earnings, Jan. 1 150,000 50,000 (3) 50,000

(5) 3,360 146,640
245,800 80,000 246,880
(2) 4,000 (40,000)
carry forward 205,800 70,000 86,320 17,400 206,880
Cash 68,000 55,000 123,000

Accounts Receivable 100,000 75,000 175,000
Inventory 120,000 110,000 230,000
Depreciable Assets (net) 360,000 210,000 (5) 5,200 564,800
Investment in:
Brown Bonds 50,000 (4) 50,000
Brown Stock 102,000 (1) 12,000
(3) 90,000
Debits 800,000 450,000 1,092,800

Bonds Payable 200,000 200,000 (4) 50,000 350,000
Bond Premium 28,000 (4) 7,000 21,000
Common Stock 300,000 100,000 (3)100,000 300,000
Retained Earnings,
from above 205,800 70,000 86,320 17,400 206,880
(3) 60,000 68,720
Credits 800,000 450,000 245,560 245,560 1,092,800
8-37
P8-23 (continued)
b. Tyler Manufacturing and Subsidiary

December 31, 20X3
Cash $ 123,000
Accounts Receivable 175,000
Inventory 230,000
Total Current Assets $ 528,000
Depreciable Assets (net) 564,800
Total Assets $1,092,800

Bonds Payable $350,000
Bond Premium 21,000 371,000
Total Controlling Interest $506,880
Total Liabilities and Stockholders' Equity $1,092,800
Tyler Manufacturing and Subsidiary

Consolidated Income Statement
Year Ended December 31, 20X3
Sales $600,000
Total Revenue $607,000
Interest Expense $ 40,000
Operating Expenses 451,800
Total Expenses (491,800)
Consolidated Net Income $115,200
Income to Noncontrolling Interest (14,960)
Income to Controlling Interest $100,240
Tyler Manufacturing and Subsidiary

Consolidated Statement of Retained Earnings
Retained Earnings, January 1, 20X3 $146,640

Income to Controlling Interest, 20X3 100,240
$246,880
Dividends Declared, 20X3 (40,000)
Retained Earnings, December 31, 20X3 $206,880
8-38
P8-24 Consolidation Workpaper — Year after Retirement
a. Elimination Entries (not required):

Investment in Stone Container Stock 24,000
Eliminate income from subsidiary:
$30,000 = $50,000 x .60

Income to Noncontrolling Interest:

Reported net income of Stone $50,000
Container
Amortization of loss on bond
retirement:
Carrying value of bond investment $106,000
Par value of debt 100,000)
Unamortized premium paid by
Bennett $ 6,000
Number of years until maturity ÷ 6
Amortization of premium annually 1,000
Realized net income of Stone
Container $51,000
Income to Noncontrolling Interest $20,400
E(3) Common Stock – Brown Corporation 100,000

Investment in Brown Stock 102,000

Investment in Stone Container Bonds 106,000
Eliminate intercorporate bond holdings.
8-39
P8-24 (continued)
a. Bennett Corporation and Stone Container Company

December 31, 20X4
Bennett Stone Eliminations Consol-

Item Corp. Container Debit Credit idated
Sales 450,000 250,000 700,000

Credits 488,000 250,000 700,000
Other Expenses 368,600 182,000 550,600
Debits (388,600) (200,000) (579,600)
Income to Noncon-
Ret. Earnings, Jan. 1 214,200 70,000 (3) 70,000

(4) 4,200 210,000
313,600 120,000 310,000
(2) 4,000 (40,000)
carry forward 273,600 110,000 132,600 19,000 270,000
Cash 61,600 20,000 81,600

Inventory 120,000 110,000 230,000
Other Assets 340,000 250,000 590,000
Investment in Stone
Container Bonds 106,000 (4)106,000
Investment in Stone
Container Stock 126,000 (1) 24,000
(3)102,000
Debits 853,600 460,000 1,081,600

Bonds Payable 200,000 200,000 (4)100,000 300,000
Common Stock 300,000 100,000 (3)100,000 300,000
Retained Earnings,
from above 273,600 110,000 132,600 19,000 270,000
(3) 68,000 81,600
Credits 853,600 460,000 335,400 335,400 1,081,600
8-40
P8-24 (continued)
b. Bennett Corporation and Subsidiary

December 31, 20X4
Cash $ 81,600
Accounts Receivable 180,000
Inventory 230,000
Total Current Assets $ 491,600
Other Assets 590,000
Total Asset $1,081,600

Total Controlling Interest $570,000
Total Liabilities and Stockholders’ Equity $1,081,600
Bennett Corporation and Subsidiary

Consolidated Income Statement
December 31, 20X4
Sales $700,000
Interest Expense $ 29,000
Other Expenses 550,600
Total Expenses (579,600)
Consolidated Net Income $120,400
Income to Noncontrolling Interest (20,400)
Income to Controlling Interest $100,000
Bennett Corporation and Subsidiary

Consolidated Statement of Retained Earnings
Retained Earnings, January 1, 20X4 $210,000

Income to Controlling Interest, 20X4 100,000
$310,000
Dividends Declared, 20X4 (40,000)
Retained Earnings, December 31, 20X4 $270,000
8-41
P8-25 Intercorporate Inventory and Debt Transfers
a. Consolidated cost of goods sold for 20X7:

Amount reported by Lance Corporation $620,000
Amount reported by Avery Company 240,000
Adjustment for unrealized profit in
beginning inventory sold in 20X7 (15,000)
Adjustment for inventory purchased from
subsidiary and resold during 20X7:
CGS recorded by Lance $40,000
CGS recorded by Avery ($60,000 - $27,000) 33,000
Total recorded $73,000
CGS based on Lance's cost
[$40,000 x ($33,000 / $60,000)] (22,000)
Required adjustment (51,000)
Cost of goods sold $794,000
b. Consolidated inventory balance:
Amount reported by Lance $167,000

Amount reported by Avery 120,000
Total inventory reported $287,000
Unrealized profit in ending inventory held by
Avery [$20,000 x ($27,000 / $60,000)] (9,000)
Consolidated balance $278,000
c. Entry to record interest expense for Avery Company:

Bond Premium 800
Cash 16,000
Computation of interest expense

Par value of bonds issued $200,000
Stated interest rate x .08
Annual interest payment $ 16,000
Annual amortization of premium ($4,800 / 6 years) (800)
Interest expense for 20X7 $ 15,200
8-42
P8-25 (continued)
d. Entry to record interest income for Lance Corporation:
Cash 6,400
Investment in Avery Company Bonds 200
Computation of interest income

Annual payment received ($80,000 x .08) $6,400
Amortization of discount
[($80,000 - $78,400) / 8 years] 200
Interest income for 20X7 $6,600
e. Income assigned to noncontrolling interest:
Net income reported by Avery Company $48,000

Adjustment for realization of profit on inventory
sold to Lance in 20X6 15,000
Adjustment for realization of constructive gain on
bond retirement ($4,160 / 8 years) (520)
Realized net income of Avery for 20X7 $62,480
Proportion of ownership held by noncontrolling
Interest x .25
Income assigned to noncontrolling interest $15,620
Computation of constructive gain on bond retirement

Bond premium, December 31, 20X7 $4,800
Remaining years’ to maturity ÷ 6
Amortization per year $ 800
Years’ to maturity at purchase x 8
Premium, December 31, 20X5 6,400
Book value of bonds $206,400
Proportion purchased x .40
Book value of bonds purchased $ 82,560
Constructive gain $ 4,160
f. Eliminating entries:

Investment in Avery Company Stock 18,000

$15,620 = ($48,000 + $15,000 - $520) x .25
8-43
P8-25 (continued)
E(3) Common Stock — Avery Company 50,000

Investment in Avery Company Stock 165,000

Cost of Goods Sold 15,000
Eliminate beginning inventory profit
of Avery Company:
$11,250 = $15,000 x .75
$3,750 = $15,000 x .25
E(5) Sales 60,000

Inventory 9,000
Eliminate intercompany sale of inventory
by Lance Corporation.

Bond Premium 1,920
Investment on Avery Company Bonds 78,800
$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
8-44
P8-25 (continued)
g. Lance Corporation and Avery Company

December 31, 20X7
Lance Avery Eliminations Consol-

Sales 750,000 320,000 (5) 60,000 1,010,000

Interest and Other
Income 16,000 5,000 (6) 6,600 14,400
Credits 802,000 325,000 1,024,400
Cost of Goods Sold 620,000 240,000 (4) 15,000
(5) 51,000 794,000
Interest and Other
Expenses 35,000 22,000 (6) 6,080 50,920
Debits (700,000) (277,000) (904,920)
Income to Noncon-
Ret. Earnings, Jan. 1 291,700 170,000 (3)170,000 (6) 2,730

(4) 11,250 283,180
393,700 218,000 387,040
(2) 6,000 (50,000)
carry forward 343,700 194,000 299,470 98,810 337,040
Cash 37,900 48,800 86,700

Other Receivables 30,000 15,000 45,000
Inventory 167,000 120,000 (5) 9,000 278,000
Land 90,000 40,000 130,000
Investment in Avery
Company Bonds 78,800 (6) 78,800
Investment in Avery
Company Stock 183,000 (1) 18,000
(3)165,000
Debits 1,196,700 578,800 1,504,700
8-45
P8-25 (continued)
Lance Avery Eliminations Consol-


Other Payables 40,000 20,000 60,000
Bonds Payable 250,000 200,000 (6) 80,000 370,000
Bond Premium 4,800 (6) 1,920 2,880
Common Stock
Lance Corporation 250,000 250,000
Avery Company 50,000 (3) 50,000
Additional Paid-In
Capital 40,000 40,000
Retained Earnings,
from above 343,700 194,000 299,470 98,810 337,040
Noncontrolling
Interest (4) 3,750 (2) 9,620
(3) 55,000
(6) 910 61,780
Credits 1,196,700 578,800 435,140 435,140 1,504,700
8-46
P8-26 Intercorporate Bond Holdings and Other Transfers

Investment in Skate Company Stock 15,000

$7,650 = ($30,000 + $600) x .25
E(3) Common Stock – Skate Company 30,000

Additional Paid-In Capital – Skate Company 20,000
Investment in Skate Company Stock 150,000
E(4) Buildings and Equipment 60,000

Depreciation Expense 1,500
Accumulated Depreciation 73,500
Eliminate unrealized profit on buildings:
$60,000 = $125,000 - $65,000
$15,000 = $65,000 - ($125,000 - $75,000)
$1,500 = ($65,000 / 10 years) - ($125,000 / 25 years)
$73,500 = ($5,000 x 16 years) - ($6,500 x 1 year)

Land 13,000
Eliminate unrealized profit on land.
8-47
P8-26 (continued)

Investment in Skate Company Bonds 42,400
Bond Discount 1,200
$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
E(7) Interest and Other Payables 2,000

Interest and Other Receivables 2,000
Eliminate intercompany interest
receivable/payable.
8-48
P8-26 (continued)
b. Pond Corporation and Skate Company

December 31, 20X8
Pond Skate Eliminations Consol-

Sales 450,000 250,000 700,000

Interest Income 18,500 (6) 3,600 14,900
Credits 491,000 250,000 714,900
Other Operating Expenses 50,000 40,000 90,000
Depreciation Expense 35,000 24,000 (4) 1,500 57,500
Miscellaneous Expenses 11,900 9,500 21,400
Debits (405,900) (220,000) (620,200)
Income to Noncon-
Ret. Earnings, Jan. 1 250,400 150,000 (3)150,000

(4) 15,000
(5) 9,750
(6) 3,150 222,500
335,500 180,000 309,550
(2) 2,500 (30,000)
carry forward 305,500 170,000 211,650 15,700 279,550
Cash 53,100 47,000 100,100

Interest and Other
Receivables 45,000 10,000 (7) 2,000 53,000
Inventory 140,000 50,000 190,000
Land 50,000 22,000 (5) 13,000 59,000
Buildings and Equipment 400,000 240,000 (4) 60,000 700,000
Investment in Skate:
Company Stock 165,000 (1) 15,000
(3)150,000
Company Bonds 42,400 (6) 42,400
Investment in Tin Co.
Bonds 134,000 134,000
Bond Discount 3,000 (6) 1,200 1,800
Debits 1,205,500 437,000 1,478,900
8-49
P8-26 (continued)
Pond Skate Eliminations Consol-

Accum. Depreciation 185,000 94,000 (4) 73,500 352,500

Interest & Other Payables 45,000 12,000 (7) 2,000 55,000
Bonds Payable 300,000 100,000 (6) 40,000 360,000
Common Stock
Pond Corporation 150,000 150,000
Skate Company 30,000 (3) 30,000
Additional Paid-In
Capital 155,000 20,000 (3) 20,000 155,000
Retained Earnings,
from above 305,500 170,000 211,650 15,700 279,550
Noncontrolling
Interest (5) 3,250 (2) 5,150
(6) 1,050 (3) 50,000 50,850
Credits 1,205,500 437,000 367,950 367,950 1,478,900
8-50
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)] $108,000
Book value [$100,000 + $4,000 +
($4,000 / 4 years)] (105,000)
Loss on bond retirement $ 3,000
8. a $4,620 Reported net income of Grange Corporation $40,000

Add: Inventory profits of prior period
realized in 20X6 2,000
Less: Unrealized inventory profits of
20X6 (6,000)
Less: Loss on bond retirement,
January 1, 20X6 (3,000)
Add: Interest differential in 20X6 600
Realized income of Grange $33,600
Less: Depreciation on differential assigned
to buildings and equipment (3,000)
Less: Impairment of goodwill (7,500)
Adjusted income $23,100
9. d $68,645 Par value of shares outstanding $200,000

Retained earnings, December 31, 20X6 125,000
Less: Unrealized inventory profit (6,000)
Unrecorded portion of bond
retirement loss ($3,000 - $600) (2,400)
Add: Unamortized differential assigned to
buildings and equipment ($30,000 -
$9,000) 21,000
Unimpaired goodwill ($13,125 - $7,500) 5,625
$343,225
Assigned to noncontrolling interest $ 68,645
10. b $5,625 ($13,125 - $7,500)
8-51
P8-28 Comprehensive Problem: Intercorporate Transfers
a. Goodwill as of January 1, 20X7:
Fair value of consideration given by Topp $1,152,000

Fair value of noncontrolling interest at acquisition 128,000
Total $1,280,000
Book value of net assets at acquisition (1,200,000)
Differential at acquisition $ 80,000
Increase in fair value of land (30,000)
Goodwill at acquisition $ 50,000
b. Computation of balance in investment account, January 1, 20X7:
Bussman stockholders' equity, January 1, 20X7:

Common stock $ 500,000
Premium on common stock 280,000
Retained earnings 470,000
Stockholders' equity, January 1, 20X7 $1,250,000
Topp's ownership share x .90
Book value of shares held by Topp $1,125,000
Differential at January 1, 20X7 ($80,000 x .90) 72,000
Balance in Investment in Bussman Stock account,
January 1, 20X7 $1,197,000
Computation of balance in investment account, December 31, 20X7:

(not required)

January 1, 20X7 $1,197,000
Add: Income from subsidiary, 20X7 90,000
Less: Dividends received ($40,000 x .90) (36,000)
December 31, 20X7 $1,251,000
c. Gain on constructive retirement of Bussman's bonds:
Original proceeds from issuance of Bussman bonds $1,010,000

Premium amortized to January 2, 20X7:
($10,000 / 10) x 6 (6,000)
Book value of bonds at constructive retirement $1,004,000
Price paid for Bussman bonds by Topp (980,000)
Gain on constructive retirement of Bussman's bonds $ 24,000
8-52
d. Income to noncontrolling interest, 20X7:
Bussman's 20X7 net income $100,000

Add: 20X6 intercompany profit realized in 20X7 4,500
Constructive gain on retirement of bonds 24,000
Less: Unrealized intercompany profit on 20X7 transfer (5,400)
Portion of constructive gain on bond retirement
recognized currently by separate affiliates
($24,000 / 4 years) (6,000)
Impairment of goodwill (25,000)
Subsidiary income to be apportioned $ 92,100
Noncontrolling interest's proportionate share x .10
Income to noncontrolling interest $ 9,210
8-53
P8-28 (continued)
e. Total noncontrolling interest, December 31, 20X6:
Bussman's stockholders' equity, December 31, 20X6 $1,250,000

Unrealized profit on intercompany sale of inventory (4,500)
Bussman's realized equity, December 31, 20X6 $1,245,500
Differential assigned to land 30,000
Differential assigned to goodwill 50,000
$1,325,500
Noncontrolling interest's proportionate share x .10
Total noncontrolling interest, December 31, 20X6 $ 132,550
f. Elimination entries:

Investment in Bussman Stock 54,000

$9,210 = [$100,000 + ($24,000 - $6,000)
+ $4,500 - $5,400 - $25,000] x .10
E(3) Common Stock — Bussman 500,000

Premium on Common Stock 280,000
Differential 80,000
Investment in Bussman Stock 1,197,000
$80,000 = $1,280,000 - $1,200,000
$133,000 = ($500,000 + $280,000 +
$470,000 + $80,000) x .10
E(4) Land 30,000

Goodwill 50,000
Differential 80,000
Assign differential.
E(5) Goodwill Impairment Loss 25,000

Goodwill 25,000
Recognize impairment of goodwill.

Investment in Topp Bonds 200,000
Eliminate intercompany holdings of Topp
bonds.
8-54
P8-28 (continued)
E(7) Other Income 20,000

Other Expenses 20,000
Eliminate interest on intercompany
holdings of Topp bonds: $200,000 x .10
E(8) Current Payables 5,000

Current Receivables 5,000
Eliminate accrued interest on intercompany
holdings of Topp bonds:
($200,000 x .10) x 1 / 4 year
E(9) Bonds Payable 1,000,000

Other Income (Interest) 125,000
Investment in Bussman Bonds 985,000
Gain on Retirement of Bonds 24,000
Other Expenses (Interest) 119,000
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

Eliminate beginning inventory profit:
$4,050 = $4,500 x .90
$450 = $4,500 x .10
$4,500 = $15,000 x .30
E(11) Sales 78,000

Inventory 5,400
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 9,000

Current Receivables 9,000
Eliminate intercompany dividend owed:
$10,000 x .90
8-55
P8-28 (continued)
g. Topp Manufacturing and Bussman Corporation
December 31, 20X7
Topp Eliminations Consol-
Item Corp. Bussman Debit Credit idated
Sales 3,101,000 790,000 (11) 78,000 3,813,000
Other Income 135,000 31,000 (7) 20,000
(9) 125,000 21,000
Gain on Retirement of
Bonds (9) 24,000 24,000
Credits 3,326,000 821,000 3,858,000
Cost of Goods Sold 2,009,000 430,000 (10) 4,500
(11) 72,600 2,361,900
Deprec. and Amortization 195,000 85,000 280,000
Goodwill Impairment Loss (5) 25,000 25,000
Other Expenses 643,000 206,000 (7) 20,000
(9) 119,000 710,000
Debits (2,847,000) (721,000) (3,376,900)
Income to NCI (2) 9,210 (9,210)
Ret. Earnings, Jan. 1 3,033,000 470,000 (3) 470,000
(10) 4,050 3,028,950
3,512,000 570,000 3,500,840
(2) 4,000 (50,000)
Ret. Earnings, Dec. 31, 3,462,000 530,000 821,260 280,100 3,450,840
Cash 39,500 29,000 68,500
Current Receivables 112,500 85,100 (8) 5,000
(12) 9,000 183,600
Inventory 301,000 348,900 (11) 5,400 644,500
Invest. in Bussman Stock 1,251,000 (1) 54,000
(3)1,197,000
Invest. in Bussman Bonds 985,000 (9) 985,000
Invest. in Topp Bonds 200,000 (6) 200,000
Land 1,231,000 513,000 (4) 30,000 1,774,000
Buildings and Equipment 2,750,000 1,835,000 4,585,000
Goodwill (4) 50,000 (5) 25,000 25,000
Differential (3) 80,000 (4) 80,000
Debits 6,670,000 3,011,000 7,280,600
Accum. Depreciation 1,210,000 619,000 1,829,000
Current Payables 98,000 79,000 (8) 5,000
(12) 9,000 163,000
Bonds Payable 200,000 1,000,000 (6) 200,000
(9)1,000,000
Premium on Bonds Payable 3,000 (9) 3,000
Common Stock 1,000,000 500,000 (3) 500,000 1,000,000
Premium on Common Stock 700,000 280,000 (3) 280,000 700,000
Retained Earnings 3,462,000 530,000 821,260 280,100 3,450,840
Noncontrolling Interest (10) 450 (2) 5,210
(3) 133,000 137,760
Credits 6,670,000 3,011,000 2,978,710 2,978,710 7,280,600
8-56
P8-29A Fully Adjusted Equity Method
a. Adjusted trial balance:
Stone Container
Bennett Corporation Company
Item Debit Credit Debit Credit
Cash $ 61,600 $ 20,000

Accounts Receivable 100,000 80,000
Inventory 120,000 110,000
Other Assets 340,000 250,000
Investment in Stone Container
Bonds 106,000
Investment in Stone Container
Stock 122,400
Interest Expense 20,000 18,000
Other Expenses 368,600 182,000
Dividends Declared 40,000 10,000
Accounts Payable $ 80,000 $ 50,000
Bonds Payable 200,000 200,000
Common Stock 300,000 100,000
Retained Earnings 210,000 70,000
Sales 450,000 250,000
Total $1,278,600 $1,278,600 $670,000 $670,000
b. Journal entries recorded by Bennett Corporation:
(1) Cash 6,000

Record dividend from Stone Container:
$10,000 x .60
(2) Investment in Stone Container Stock 30,000

$50,000 x .60
8-57
P8-29A (continued)
(3) Investment in Stone Container Stock 600

Income from Subsidiary 600
Adjust for portion of loss on
constructive retirement recognized:
($7,000 / 7 years) x .60
Computation of 20X3 constructive loss on bond retirement
Bond investment, December 31, 20X4 $106,000

Amortization of premium in 20X4:
Interest income based on par value $ 9,000
Interest income recorded by Bennett (8,000)
Amortization of premium 1,000
Purchase price paid by Bennett,
December 31, 20X3 $107,000
Bond liability reported by Stone
Container, December 31, 20X3 (100,000)
Constructive loss on bond retirement $ 7,000


$20,400 = ($50,000 + $1,000) x .40
E(3) Common Stock – Stone Container 100,000


$4,200 = $7,000 constructive loss x .60
8-58
P8-29A (continued)
d. Bennett Corporation and Stone Container Company

December 31, 20X4

Sales 450,000 250,000 700,000

Credits 488,600 250,000 700,000
Other Expenses 368,600 182,000 550,600
Debits (388,600) (200,000) (579,600)
Income to Noncon-
Ret. Earnings, Jan. 1 210,000 70,000 (3) 70,000 210,000

310,000 120,000 310,000
(2) 4,000 (40,000)
carry forward 270,000 110,000 129,000 19,000 270,000
Cash 61,600 20,000 81,600

Inventory 120,000 110,000 230,000
Other Assets 340,000 250,000 590,000
Investment in Stone
Investment in Stone
Container Stock 122,400 (4) 4,200 (1) 24,600
(3)102,000
Debits 850,000 460,000 1,081,600

Bonds Payable 200,000 200,000 (4)100,000 300,000
Common Stock 300,000 100,000 (3)100,000 300,000
Retained Earnings,
from above 270,000 110,000 129,000 19,000 270,000
(3) 68,000 81,600
Credits 850,000 460,000 336,000 336,000 1,081,600
8-59
P8-30A Cost Method
a. Journal entry recorded by Bennett Corporation:
Cash 6,000
Dividend Income 6,000
Record dividend from Stone Container:
$10,000 x .60
E(1) Dividend Income 6,000

Eliminate dividend income from
subsidiary.

$20,400 = ($50,000 + $1,000) x .40
E(3) Common Stock – Stone Container 100,000

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

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

8-60
P8-30A (continued)
Computation of 20X3 constructive loss on bond retirement
Bennett's Bond investment, December 31, 20X4 $106,000

Amortization of premium in 20X4:
Interest income based on par value $9,000
Interest income recorded by Bennett (8,000)
Amortization of premium 1,000
Purchase price paid by Bennett,
December 31, 20X3 $107,000
Bond liability reported by Stone
Container, December 31, 20X3 (100,000)
Constructive loss on bond retirement $ 7,000
8-61
P8-30A (continued)
c. Bennett Corporation and Stone Container Company

December 31, 20X4

Sales 450,000 250,000 700,000

Dividend Income 6,000 (1) 6,000
Credits 464,000 250,000 700,000
Other Expenses 368,600 182,000 550,600
Debits (388,600) (200,000) (579,600)
Income to Noncon-
Ret. Earnings, Jan. 1 187,200 70,000 (3) 25,000

(4) 18,000
(5) 4,200 210,000
262,600 120,000 310,000
(2) 4,000 (40,000)
carry forward 222,600 110,000 81,600 19,000 270,000
Cash 61,600 20,000 81,600

Inventory 120,000 110,000 230,000
Other Assets 340,000 250,000 590,000
Investment in Stone
Investment in Stone
Container Stock 75,000 (3) 75,000
Debits 802,600 460,000 1,081,600

Bonds Payable 200,000 200,000 (5)100,000 300,000
Common Stock 300,000 100,000 (3)100,000 300,000
Retained Earnings,
from above 222,600 110,000 81,600 19,000 270,000
(3) 50,000
(4) 18,000 81,600
Credits 802,600 460,000 284,400 284,400 1,081,600
8-62

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C8-1 Recognition of Retirement Gains and Losses

C8-2 Borrowing by Variable Interest Entities

From: , Accounting Staff

Re: Consolidation of Joint Venture

Case 8-3 Subsidiary Bond Holdings

To: Financial Vice-President

From: , Accounting Staff

Re: Investment in Bonds Issued by Subsidiary

In preparing Farflung’s consolidated statements at December 31, 20X4, the following

E(1) Bonds Payable 400,000

E(2) Bonds Payable 400,000

(a) ($400,000 x .08) - ($24,000/15 years)

C8-4 Interest Income and Expense

b. With the information given, the following appears to be true:

C8-5 Intercompany Debt

b. Hershey's intercompany receivables/payables appear to come primarily from

E8-1 Bond Sale from Parent to Subsidiary

a. Journal entries recorded by Humbolt Corporation:

December 31, 20X2

Interest Receivable 4,500

b. Journal entries recorded by Lamar Corporation:

December 31, 20X2

c. Eliminating entries, December 31, 20X2:

E(1) Bonds payable 150,000

E(2) Interest payable 4,500

E8-2 Computation of Transfer Price

a. $105,000 = $100,000 par value + ($250 x 20 periods) premium

b. $103,500 = $105,000 - ($250 x 6 periods)

E(1) Bonds Payable 100,000

E(2) Interest Payable 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:

December 31, 20X4

c. Eliminating entries, December 31, 20X4:

E(1) Bonds Payable 400,000

E(2) Interest Payable 16,000

E8-4 Evaluation of Intercorporate Bond Holdings

E8-5 Multiple-Choice Questions

2. a The loss on bond retirement will result in a reduction in consolidated retained

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

6. c Operating income of Kruse Corporation $40,000

E8-6 Multiple-Choice Questions

1. a $14,000 = [($300,000 x .09) - ($60,000 / 10 years)]

2. c $12,000 = [$120,000 - ($20,000 / 10 years) x 2 years] - $104,000

3. b Net income of Solar Corporation $30,000

E8-7 Constructive Retirement at End of Year

a. Eliminating entries, December 31, 20X5:

E(1) Bonds Payable 400,000

E(2) Interest Payable 18,000

b. Eliminating entries, December 31, 20X6:

E(1) Bonds Payable 400,000

E(2) Interest Payable 18,000

E8-8 Constructive Retirement at Beginning of Year

a. Eliminating entries, December 31, 20X5:

E(1) Bonds Payable 400,000

E(2) Interest Payable 18,000

b. Eliminating entries, December 31, 20X6:

E(1) Bonds Payable 400,000

E(2) Interest Payable 18,000

E8-9 Retirement of Bonds Sold at a Discount