Chapter 7:

Intercompany Profit
Transactions –
Bonds

to accompany
Advanced Accounting, 11th edition
by Beams, Anthony, Bettinghaus, and Smith

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 Intercompany Profits on Bonds:
Objectives
1. Differentiate between intercompany
receivables and payables, and assets or
liabilities of the consolidated reporting entity.
2. Demonstrate how a consolidated reporting
entity constructively retires debt.
3. Defer unrealized gains/losses and later
recognize realized gains/losses on bond
transfers between parent and subsidiary.
4. Adjust calculation of noncontrolling interest
share amounts in the presence of
intercompany gains/losses on debt transfers.
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Intercompany Profit Transactions – Bonds

1: INTERCOMPANY
RECEIVABLES AND
PAYABLES

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 Intercompany Payables and Receivables
Remove intercompany:
 Payables and interest expense
 Receivables and interest income
Loans directly between affiliates generally
pose no special problems

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 Retirement of Debt
 Issuing firm uses own resources to retire its own
bonds – no intercompany (IC) issues
 Issuing firm borrows from unaffiliated entity and
uses funds to retire its own debt – no IC
 Issuing firm borrows from affiliate and uses funds
to retire its own debt – simple IC loan
 Non-issuing firm purchases debt securities of an
affiliate resulting in constructive retirement – IC
constructive retirement

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Intercompany Profit Transactions – Bonds

2: CONSTRUCTIVE
RETIREMENT OF DEBT

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 Constructive Retirement
One company purchases debt instruments of
an affiliate from outside entities
Constructive gains and losses on bonds
1. Realized gains and losses from the consolidated
viewpoint
2. That arise when a company purchases the bonds
of an affiliate
3. From other entities
4. At a price other than the book value of the bonds.

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 Agency Theory
Agency theory
 Assigns gain or loss to the issuing firm
 Conceptually superior than other methods
Text:
 Follows agency theory
 Simplifies discussion using straight line
amortization of premiums & discounts
Other methods
 Assign gain or loss to affiliates based on the par value
of the bonds – par value theory
 Assign all gain or loss to the parent
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Intercompany Profit Transactions – Bonds

3: PROFITS ON BONDS

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 Parent is Issuer
At constructive retirement
 Remove Investment in Bonds
 Remove proportionate share of Bonds payable and
unamortized premium or discount
 Realize a gain or loss
The gain or loss at constructive retirement is
recognized over the life of the bonds
Gain or loss is attributed solely to the parent

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 Subsidiary Acquires Parent Bonds
Pam owns 70% of Sue, acquired at book value.
Sue's net income for 2010 is $220.
On 1/1/12, Pam has $10,000 bonds outstanding with
unamortized premium of $100. Bonds mature in 5
years. Straight line amortization. Interest is 10%,
payable semi-annually.
On 1/1/12, Sue acquires $1,000 of Pam's bonds on
the open market at $950. Straight line.
 Portion of bonds retired: 1,000/10,000 = 10%
 Gain on retirement: 10%(10,100) – 950 = $60
 Pam's Investment in Sue: 70%(220) + 60 – 12 = $202
 Noncontrolling interest share: 30%(220) = $66

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 Amortizations and Interest
Book
value Fiscal Book value Fiscal Book value
PAM’S BOOKS: 1/1/2012 Year 2012 12/31/ 2012 Year 2013 12/31/ 2013
Bonds payable $10,100 -$20 $10,080 -$20 $10,060
Retired 10% $1,010 $1,008 $1,006
500+500-20 500+500-20
Interest expense =$980 =$980
Retired 10% $98 $98

SUE'S BOOKS:
Investment in $950 +$10 $960 +$10 $970
bonds
50+50+10 50+50+10
Interest income =$110 =$110

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 Worksheet Entries for Bonds
Entries for 2012 worksheet.
Bonds payable (-L) 1,008
Investment in bonds (-A) 960
Gain on retirement of bonds (Ga, +SE) 48
Interest income (-R, -SE) 110
Interest expense (-E, +SE) 98
Gain on retirement of bonds (Ga, +SE) 12
Interest payable (-L) 50
Interest receivable (-A) 50
Had a consolidated balance sheet been prepared on 1/1/2012, the
date of the retirement, the first entry would have recorded
amounts at $1010, $950, and $60, respectively. There would be
no interest.
One entry could have been used above, with a gain of $60.
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 Piecemeal Recognition
 The constructive gain of $60 is recognized in 2012
when the bonds are constructively retired.
 The difference between interest income $98 and
interest expense on the retired bonds $110 is $12.
 This $12 is an adjustment to investment income.
 Pam is the issuer, so the full $12 is attributed to
Pam.
 If Sue was the issuer, the $12 would be shared
among the controlling and noncontrolling
interests.

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 Amortizations and Interest
Book
value Fiscal Book value Fiscal Book value
PAM’S BOOKS: 1/1/2012 Year 2012 12/31/ 2012 Year 2013 12/31/ 2013
Bonds payable $10,100 -$20 $10,080 -$20 $10,060
Retired 10% $1,010 $1,008 $1,006
500+500-20 500+500-20
Interest expense =$980 =$980
Retired 10% $98 $98

SUE'S BOOKS:
Investment in $950 +$10 $960 +$10 $970
bonds
50+50+10 50+50+10
Interest income =$110 =$110

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 2013 Worksheet Entries
Entries for 2013 worksheet, assuming that Pam
has not yet paid the second interest payment.
Bonds payable (-L) 1,006
Interest income (-R, -SE) 110
Investment in bonds (-A) 970
Interest expense (-E, +SE) 98
Investment in Sue (-A) 48
Interest payable (-L) 50
Interest receivable (-A) 50

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 Subsequent Worksheet Entries
 Notice that there is no gain in subsequent years.
 The $60 “gain” is amortized each year by $12, so
the Investment account is increased by $48 in
2013.
 The Investment in Sue account will be credited by
$36 in 2014, by $24 in 2015, and so forth.
 Had Sue been the issuer, the $48 credit for 2012
would be shared between:
 Investment in Sue and
 Noncontrolling Interest

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Intercompany Profit Transactions – Bonds

4: EFFECT ON
NONCONTROLLING
INTEREST

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 Subsidiary Issuer with Gain
Constructive gain
 Purchase price of the debt is less than the book
value
 Share gain between CI and NCI in year of
retirement.
 Increase Income from subsidiary
 Increase Noncontrolling interest share
 In current and subsequent years, use piecemeal
recognition
 Reduce Income from subsidiary
 Reduce Noncontrolling interest share
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 Subsidiary Issuer with Loss
Constructive loss
 Purchase price of the debt is greater than the book
value
 Share loss between CI and NCI in year of
retirement.
 Reduce Income from subsidiary
 Reduce Noncontrolling interest share
 In current and subsequent years, use piecemeal
recognition
 Increase Income from subsidiary
 Increase Noncontrolling interest share
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 Parent Acquires Subsidiary Bonds
Pine owns 80% of Scent, acquired at book value.
Scent's net income for 2012 is $500.
On 1/1/12, Scent has $5,000, bonds outstanding with
unamortized discount of $200. Bonds mature in 8
years. Straight line amortization. Interest is 10%
payable semi-annually. Interest expense = $525.
On 1/1/12, Pine acquires $2,000 of Scent's bonds on the
open market at $2,040. Straight line. Interest income =
$195.
 Portion of bonds retired: 2,000/5,000 = 40%
 Loss on retirement: 40%(4,800) – 2,040 = -$120
 Pine's Investment in Scent: 80%(500 – 120 + 210 - 195) = $316
 Noncontrolling interest share: 20%(500 – 120 + 210 - 195) = $79
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 Amortizations and Interest
Book
value Fiscal Year Book value Fiscal Year Book value
SCENT'S BOOKS: 1/1/2012 2012 12/31/2012 2013 12/31/2013
Bonds payable $4,800 +$25 $4,825 +$25 $4,850
Retired 40% $1,920 $1,930 $1,940
250+250+25 250+250+25
Interest expense =$525 =$525
Retired 40% $210 $210

PINE'S BOOKS:
Investment in $2,040 -$5 $2,035 -$5 $2,030
bonds
100+100-5 100+100-5
Interest income =$195 =$195

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 2012 Entries with Loss
Entries for 2012 worksheet, assuming the
second interest payment has not yet been paid.
Bonds payable (-L) 1,930
Interest income (-R, -SE) 195
Loss on retirement of bonds (Lo, -SE) 120
Interest expense (-E, +SE) 210
Investment in bonds (-A) 2,035
Interest payable (-L) 100
Interest receivable (-A) 100

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 Amortizations and Interest
Book
value Fiscal Year Book value Fiscal Year Book value
SCENT'S BOOKS: 1/1/2012 2012 12/31/2012 2013 12/31/2013
Bonds payable $4,800 +$25 $4,825 +$25 $4,850
Retired 40% $1,920 $1,930 $1,940
250+250+25 250+250+25
Interest expense =$525 =$525
Retired 40% $210 $210

PINE'S BOOKS:
Investment in $2,040 -$5 $2,035 -$5 $2,030
bonds
100+100-5 100+100-5
Interest income =$195 =$195

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 2013 Worksheet Entries
Entries for 2013 worksheet, assuming that
Scent has not yet paid the second interest
payment.
Bonds payable (-L) 1,940
Interest income (-R, -SE) 195
Investment in Scent (+A) 105
Investment in bonds (-A) 2,030
Interest expense (-E, +SE) 210
Interest payable (-L) 100
Interest receivable (-A) 100

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 Latihan soal 1

P memiliki 80% S, yang diperoleh sebesar nilai bukunya. Pada tahun 2014 S
memiliki laba bersih senilai 25. 000.000 . pada tanggal 1 januari 2014, P memiliki
obligasi yang beredar senilai 200 juta dengan premium yang belum diamortisasi
sebesar 2.000.000. jatuh tempo obligasi tersebut adalah 5 tahun. Metode
amortisasi yang digunakan garis lurus dengan bunga obliges 10% dan dibayarkan
setengah tahunan.
Pada tanggal 1/1 2014 S memperoleh 25 juta obligasi P dipasar obligasi dengan
nilai 24.500.000.
Atas dasar info diatas:
1. Hitunglah bagian obligasi P yang dibeli S
2. Laba rugi atas perolehan obligasi P oleh S
3. Saldo investasi P pada S pada akhir tahun 2014
4. Hak NCI pada akhir tahun 2014
5. Jurnal yang diperlukan untuk mencatat peroleh obligasi P oleh S beserta
pengakuan bunganya serta jurnal eliminasi yang dibutuhkan bila pada akhir
tahun 2014 P menyusun LK konsolidasi
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 Latihan soal 2

PT P memiliki 60% S yang diperoleh pada nilai bukunya . PT S mendapat

rugi sebesar 10.000.000 ditahun 2013. Pada tanggal 1 januari 2013, S
memiliki obligasi senilai 100.000.000 dengan diskonto yang belum
diamortisasi senilai 2.000.000 obligasi akan jatuh tempo dalam 10 tahun
kedepan. Amortisasi atas diskonto dilakukan dengan metode garis lurus.
Bunga obligasi sebesar 15 % dan dibayar setahun 2x pada akhir bulan Maret
dan september. Pada tanggal 1 januari 2013, PT P memperoleh 30.000.000
obligasi PT S dipasar sekuritas senilai 35.000.000. Diminta:
Hitungla proporsi obligasi yang dihentikan
Hitunglah laba/rugi penghentian obligasi
Hitunglah hak induk atas laba PT anak tahun 2013
Hitunglah nilai investasi P pada S diakhir tahun 2013
Hitunglah hak NCI atas PT S diakhir tahun 2013
Buatlah jurnal eliminasi diakhir tahun 2013 dan 2014

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