Christensen 12e Chap08SL SM PDF

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Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consentINTERCOMPANY INDEBTEDNESSSOLUTIONS TO APPENDIX EXERCISESE8-1A Bond Sale from Parent to SubsidiaryInvestment in PretzelCorporation Bonds 156,Cash 156,Cash 156,Bonds Payable 15...

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Chapter 08 - Intercompany Indebtedness

CHAPTER 8 INTERCOMPANY INDEBTEDNESS SOLUTIONS TO APPENDIX EXERCISES E8-1A Bond Sale from Parent to Subsidiary a.

Journal entries recorded by Stick Corporation:

January 1, 20X2 Investment in Pretzel Corporation Bonds Cash

156,000 156,000

July 1, 20X2 Cash Interest Income Investment in Pretzel Corporation Bonds

4,500 4,200 300

December 31, 20X2 Interest Receivable Interest Income Investment in Pretzel Corporation Bonds b.

4,500 4,200 300

Journal entries recorded by Pretzel Corporation:

January 1, 20X2 Cash Bonds Payable Bond Premium

156,000 150,000 6,000

July 1, 20X2 Interest Expense Bond Premium Cash December 31, 20X2 Interest Expense Bond Premium Interest Payable c.

4,200 300 4,500 4,200 300 4,500

Consolidation entries, December 31, 20X2: Bonds payable Premium on Bonds Payable Interest income Investment in Pretzel Corporation Bonds Interest expense Eliminate intercompany bond holdings. Interest payable Interest receivable Eliminate intercompany receivable/payable.

150,000 5,400 8,400 155,400 8,400 4,500 4,500

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Chapter 08 - Intercompany Indebtedness

E8-2A 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.

Consolidation entries: Bonds Payable Bond Premium Interest Income Investment in Stallion Corporation Bonds Interest Expense Interest Payable Interest Receivable

100,000 3,500 11,500 103,500 11,500 6,000 6,000

E8-3A Bond Sale at Discount a.

$16,800 = [($600,000 x 0.0 8) + ($12,000 / 5 years)] x 1/3

b.

Journal entries recorded by Purse Corporation:

January 1, 20X4 Cash Interest Receivable

16,000

July 1, 20X4 Cash Investment in Scarf Company Bonds Interest Income $800 = ($400,000 - $392,000)/(5 x 2)

16,000 800

December 31, 20X4 Interest Receivable Investment in Scarf Company Bonds Interest Income

16,000 800

c.

16,000

16,800

16,800

Consolidation entries, December 31, 20X4: Bonds Payable Interest Income Investment in Scarf Company Bonds Bond Discount Interest Expense $33,600 = $16,000 + $16,000 + $800 + $800 $395,200 = $392,000 + ($800 x 4) $4,800 = $8,000 - ($800 x 4) Interest Payable Interest Receivable

400,000 33,600 395,200 4,800 33,600

16,000 16,000

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Chapter 08 - Intercompany Indebtedness

E8-5A Multiple-Choice Questions 1. b – $4,700 = ($50,000 x 0.10) - ($3,000 / 10 years) 2. a – $4,000 = ($50,000 x 0.10) - ($8,000 / 8 years) 3. c – $5,600 = $58,000 purchase price - [$53,000 - ($3,000 / 10 years) x 2 years] 4 c – .

Operating income of Kruse Corporation

$40,000

Net income of Gary's Ice Cream Parlors

20,000 $60,000 (5,600)

Less:

Loss on bond retirement Recognition during 20X6 ($4,700 - $4,000) Consolidated net income

700 $55,100

E8-6A Multiple-Choice Questions 1.

a–

$14,000 = [($300,000 x 0.09) - ($60,000 / 10 years)] x ($200,000 / $300,000)

2.

c–

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

3.

b–

Net income of Solar Corporation Unrecognized portion of gain on bond retirement ($12,000 - $1,500) Proportion of stock held by noncontrolling interest Income to noncontrolling interest

$30,000 10,500 $40,500 x .20 $ 8,100

E8-7A Constructive Retirement at End of Year a.

Consolidation entries, December 31, 20X5: Bonds Payable Premium on Bonds Payable Investment in Suspect 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

400,000 9,000 397,000 12,000

Interest Payable 18,000 Interest Receivable 18,000 The basic entry (not shown) would be adjusted by 12,000 to complete the elimination process.

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Chapter 08 - Intercompany Indebtedness

E8-7A (continued) Consolidation entries, December 31, 20X6: b. Bonds Payable Premium on Bonds Payable Interest Income Investment in Suspect Company Bonds Interest Expense Investment in Suspect Co. NCI in NA of Suspect 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

400,000 8,400 36,200 397,200 35,400 7,200 4,800

Interest Payable 18,000 Interest Receivable 18,000 The basic entry (not shown) would be adjusted by 800 to complete the elimination process. E8-8A Constructive Retirement at Beginning of Year a.

Consolidation entries, December 31, 20X5: Bonds Payable 400,000 Premium on Bonds Payable 9,000 Interest Income 36,200 Investment in Suspect 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 18,000 Interest Receivable 18,000 The basic entry (not shown) would be adjusted by 800 to complete the elimination process.

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Chapter 08 - Intercompany Indebtedness

E8-8A (continued) b.

Consolidation entries, December 31, 20X6: Bonds Payable Premium on Bonds Payable Interest Income Investment in Suspect Company Bonds Interest Expense Investment in Suspect Co. NCI in NA of Suspect Co.

400,000 8,400 36,200 397,200 35,400 7,200 4,800

Interest Payable 18,000 Interest Receivable 18,000 The basic entry (not shown) would be adjusted by 800 to complete the elimination process. E8-9A 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 Packed Corporation Bonds 297,120 Interest Expense 21,450 Discount on Bonds Payable 5,400 The basic entry (not shown) would be adjusted by 2,520 (21240+273021450) to complete the elimination process. Eliminate intercompany 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 - $291,000) / 20 years] x 7 years Book value of liability at January 1, 20X8

$291,000 3,150 $294,150

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Chapter 08 - Intercompany Indebtedness

E8-10A Loss on Constructive Retirement Consolidation entries, December 31, 20X8: Bonds Payable Interest Income Loss on Bond Retirement Investment in Par Corporation Bonds Discount on Bonds Payable Interest Expense Interest Payable Interest Receivable

100,000 8,000 12,000 106,000 3,000 11,000 5,000 5,000

The basic entry (not shown) would be adjusted by 9,000 (8000+12000-11000) to complete the elimination process. E8-11A Determining the Amount of Retirement Gain or Loss a.

Par value of bonds outstanding Annual interest rate Interest payment Amortization of bond premium ($200,000 x 15% ) / 5 years Interest charge for full year Less: Interest on bond purchased by Pepper Enterprises [($18,000 x 1/2) x (4 months / 12 months)] Interest expense included in consolidated income statement

$200,000 x .12 $ 24,000

b.

Sale price of bonds, January 1, 20X1 Amortization of premium [($15,000 / 5) x 2 2/3 years] Book value at time of purchase Purchase price Gain on bond retirement

$115,000 (8,000) $107,000 (100,000 ) $ 7,000

c.

Consolidation entries, December 31, 20X3: Bonds Payable Bond Premium Interest Income Investment in Salt Bonds Interest Expense Gain on Bond Retirement Interest Payable Interest Receivable

(6,000) $ 18,000 (3,000) $ 15,000

100,000 6,000 4,000 100,000 3,000 7,000 6,000 6,000

The basic entry (not shown) would be adjusted by 6,000 (7,000+3,000-4,000) to complete the elimination process.

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Chapter 08 - Intercompany Indebtedness

E8-12A Evaluation of Bond Retirement a.

No gain or loss will be reported by Sibling.

b.

A gain of $13,000 will be reported: Book value of liability reported by Sibling: Par value of bonds outstanding Unamortized premium $8,000 - [($8,000 / 10 years) x 3.5 years] Book value of debt Amount paid by Parent Gain on bond retirement

c.

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

Consolidated net income for 20X6 will increase by $12,000: Gain on bond retirement Adjustment for excess of interest income over interest expense: Interest income Interest expense Increase in consolidated net income

d.

$200,000

$ 13,000 $(11,600) 10,600

(1,000) $ 12,000

Consolidation entries, December 31, 20X6: Bonds Payable Premium on Bonds Payable Interest Income Investment in Sibling Company Bonds Interest Expense Gain on Bond Retirement Eliminate intercompany 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 11,600 192,800 10,600 13,000

11,000 11,000

The basic entry (not shown) would be adjusted by 12,000 (10,600+13,000-11,600) to complete the elimination process.

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Chapter 08 - Intercompany Indebtedness

E8-12A (continued) e.

Consolidation entries, December 31, 20X7: Bonds Payable Premium on Bonds Payable Interest Income Investment in Sibling Company Bonds Interest Expense Investment in Sibling Co. NCI in NA of Sibling Co. Eliminate intercompany 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

200,000 4,000 23,200

Interest Payable Interest Receivable Eliminate intercompany receivable/payable.

11,000

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

11,000

The basic entry (not shown) would be adjusted by 2,000 (23,200-21,200) to complete the elimination process. f.

Income assigned to noncontrolling interest in 20X7 is $14,400: Net income reported by Sibling 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

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

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Chapter 08 - Intercompany Indebtedness

E8-13A Loss on Constructive Retirement a.

Consolidation 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 intercompany 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)

100,000 3,000 11,300 1,400 104,200 11,500

Interest Payable 6,000 Interest Receivable 6,000 Eliminate intercompany receivable/payable. The basic entry (not shown) would be adjusted by 1,200 (11,300+1,40011,500) to complete the elimination process. 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

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

200 $ 18,800 x 0.35 $ 6,580

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Chapter 08 - Intercompany Indebtedness

E8-13A (continued) c.

Consolidation 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 intercompany 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 11,300 780 420 103,500 11,500

6,000 6,000

The basic entry (not shown) would be adjusted by 200 (11,500-11,300) to complete the elimination process.

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Chapter 08 - Intercompany Indebtedness

SOLUTIONS TO APPENDIX PROBLEMS P8-14A Consolidation Worksheet with Sale of Bonds to Subsidiary a.

b.

Entries recorded by Porter on its investment in Service: Cash Investment in Service Corporation Record dividends from Service : $10,000 x 0.60

6,000

Investment in Service Corporation Income from Service Corporation Record equity-method income: $30,000 x 0.60

18,000

6,000

18,000

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.

6,400

Entry recorded by Service on bond investment: Cash Interest Income Investment in Porter Company Bonds

6,400 6,000 400

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Chapter 08 - Intercompany Indebtedness

P8-14A (continued) d. Book Value Calculations:

Beginning Book Value + Net Income - Dividends Ending Book Value

NCI 40% 60,000 12,000 (4,000) 68,000

+

Basic Consolidation Entry Common Stock Retained Earnings Income from Service Co. NCI in NI of Service Co. Dividends Declared Investment in Service Co. NCI in NA of Service Co. Eliminate Intercompany Bond Holdings Bonds Payable Bond Premium Interest Income Investment in Porter Co. Bonds Interest Expense

Porter Co. 60% 90,000 18,000 (6,000) 102,000

=

Common Stock 100,000

100,000

+

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

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

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

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Chapter 08 - Intercompany Indebtedness

P8-14A (continued) e.

Income Statement Sales Interest Income Less: COGS Less: Depreciation Expense Less: Interest Expenses Income from Service 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 Service Co. Total Assets Accounts Payable Bonds Payable Bond Premium Common Stock Retained Earnings NCI in NA of Service Co. Total Liabilities & Equity

Porter Co.

Service Co.

200,000

114,000 6,000 (61,000) (15,000) (14,000)

(99,800) (25,000) (6,000) 18,000 87,200

30,000

87,200

30,000

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

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

80,200 120,000 500,000 (175,000)

40,000 65,000 300,000 (75,000) 81,200

102,000 627,200

411,200 41,200 200,000

Consolidation Entries DR CR

6,000

314,000 0 (160,800) (40,000) (14,000) 0 99,200 (12,000) 87,200

6,000 10,000 16,000

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

81,200 102,000 183,200

120,200 185,000 800,000 (250,000) 0 0 855,200

16,000 68,000 84,000

110,000 200,000 0 200,000 277,200 68,000 855,200

6,000

6,000 18,000 24,000 12,000 36,000

50,000 36,000 86,000

0

68,800 80,000 1,200 200,000 277,200

100,000 70,000

80,000 1,200 100,000 86,000

627,200

411,200

267,200

Consolidated

6,000

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Chapter 08 - Intercompany Indebtedness

P8-15A Consolidation Worksheet with Sale of Bonds to Parent a.

b.

Entries recorded by Punk Corporation on its investment in Soul Company: Cash Investment in Soul Company Stock Record dividends from Soul : $20,000 x 0.90

18,000

Investment in Soul Company Stock Income from Soul Company Record equity-method income: $25,000 x 0.90

22,500

18,000

22,500

Entry recorded by Punk Corporation on its investment in Soul Company bonds: Cash 6,000 Interest Income Investment in Soul Company Bonds Record interest payment: $800 = ($104,000 - $100,000) / 5 years

c.

5,200 800

Entry recorded by Soul Company on its bonds payable: Interest Expense Bond Premium Cash
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