Solution Manual Advanced Accounting 4e Jeter Ch09 PDF

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To download more slides, ebook, solutions and test bank, visit CHAPTER 9 ANSWERS TO QUESTIONS 1. Constructive retirement refers to the purchase of an outstanding bonds from outsiders. From a consolidated entity viewpoint, the consolidated entity has retired its outstanding debt, and is thus treated ...

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CHAPTER 9 ANSWERS TO QUESTIONS 1.

Constructive retirement refers to the purchase of an affiliate's outstanding bonds from outsiders. From a consolidated entity viewpoint, the consolidated entity has retired its outstanding debt, and is thus treated as an early extinguishment of debt. The difference between the carrying value of the bonds and the purchase price to the purchasing affiliate is the constructive gain or loss on bond retirement.

2.

The gain or loss is composed of two elements: (1) the discount or premium on the books of the issuer, and (2) the discount or premium paid by the purchaser. Discounts and/or premiums on the books of the two affiliates will be subsequently amortized to income. The cumulative effect on income of the amortization of the discount or premium by the two affiliates is equal to the constructive gain or loss.

3.

The allocation of a gain or loss would be made to each affiliate based on whether the affiliate paid or issued the bonds for more or less than book value or par value. A discount (premium) to the issuer would be allocated to the issuing company as a loss (gain), whereas a discount (premium) to the purchasing affiliate would be a gain (loss). The sum of the two is the total constructive gain or loss.

4.

Support for allocating the total gain or loss to the issuing company is based on the contention that the purchasing affiliate is acting as an agent for the issuing company. Since both companies are under the control of the management of the parent company, the bonds could be transferred to the issuing company. Thus, the purchase is in substance a retirement by the issuing company.

5.

The noncontrolling interest is affected by the portion of the constructive gain or loss allocated to the subsidiary. Because the loss is recognized in the consolidated income statement in the year the bonds are purchased, a discount or premium amortization related to bonds that is made subsequent to the purchase is added back or is subtracted from the subsidiary's reported income. Such adjustments will increase or decrease the noncontrolling interest in the income of the subsidiary.

6.

a. Investor Company Purchase price Par value Constructive gain

$338,000 350,000 $ 12,000

b. Investee Company Carrying value Par value Constructive gain

$360,000 350,000 $ 10,000

7.

The outside party (the maker of the note) is primarily liable; and Affiliate Y, who discounted the note with an outside party, is contingently liable for it.

8.

Stock dividends are viewed as a distribution of the earliest earnings accumulated in the retained earnings account.

9.

The retained earnings balance at the date of acquisition is reduced since the issuance of a stock dividend is viewed as a distribution of the earliest earnings accumulated.

9-1

10. A memorandum entry is required to recognize the number of shares received since a dividend in stock is not considered income to the recipient. 11. In the year of declaration, one additional elimination entry is required to eliminate the effects of the dividend. In subsequent periods the amounts of this entry are combined with the investment elimination entry. 12. Preferred stock of a controlled corporation held by others not in the controlled group represents noncontrolling interest in the controlled corporation. The rights of these shareholders depend on the stock's preference; possibilities are an interest in net assets, earnings, and retained earnings of the controlled corporation. 13. Excess of cost over book value is debited to Other Contributed Capital or to Retained Earnings; excess of book value acquired over cost is credited to Other Contributed Capital. 14. The preferred stock's cumulative preference would increase the net loss allocable to the common stockholders. SOLUTIONS TO BUSINESS ETHICS CASE The responsibility of the management of the company is to present accurately the financial statements to the shareholders and investors. Accordingly if an error is detected in the books, it should be rectified as soon as it is discovered so that shareholders and investors are not misled. Intercompany sales are eliminated in the consolidating process. Failure to do so is a material omission, particularly when the inventories in question have not been sold to outsiders but remain in the inventories of the consolidated entity. You should not succumb to the pressure exerted by the manager of the subsidiary. SOLUTIONS TO EXERCISES Exercise 9-1 Part A

Part B

Cost of bond investment Par value Unamortized discount ($60,000 (16/20)) Carrying value of bonds Percent of bonds purchased Carrying value of bonds purchased Total constructive loss

$820,000 $1,000,000 48,000 952,000 .80 761,600 $58,400

Pacelli Company

Salez Company

Carrying value of bonds purchased $761,600 Par value 800,000 Constructive loss $ 38,400

Cost of bond investment $820,000 Par value of bonds purchased 800,000 Constructive loss $ 20,000

9-2

Part C June 30 and December 31, 2012 Pacelli Company Interest Expense (10%)(1/2)($1,000,000) Cash

50,000 50,000

Interest Expense Discount on Bonds Payable $60,000 / 20 interest periods = $3,000

3,000 3,000

Salez Company Cash Interest Income ($800,000)(1/2)(10%)

40,000 40,000

Interest Income Investment in Pacelli Company Bonds $20,000 premium /16 periods = $1,250

1,250 1,250

Part D Note: We have provided solutions assuming the use of any of the three methods. Since the schedules start with the same reported income of Pacelli under all three methods, this results in three different consolidated net income numbers. 2011

Partial Complete Cost Method Equity Method Equity Method $260,000 $260,000 $260,000 48,000 112,000

Reported net income - Pacelli Less: Dividend income ($60,000)(.80) Less: Equity Income ($140,000)(.80) Less: Adjusted Equity Income ($112,000-38,400-(80% of 20,000)) Net income from independent operations - Pacelli 212,000 Less: Constructive loss on bond retirement 38,400 Pacelli's contribution to consolidated income 173,600 Reported net income of Salez $140,000 Less: Constructive loss on bond retirement 20,000 Salez's contribution to consolidated income 120,000 .80 96,000 Controlling interest in consolidated net income $269,600 Noncontrolling interest in consolidated income ($120,000 .20) $24,000

9-3

148,000 38,400 109,600

57,600 202,400 38,400 164,000

96,000 $205,600

96,000 $260,000

$24,000

$24,000

Exercise 9-1 (continued) Partial Complete 2012 Cost Method Equity Method Equity Method Reported net income - Pacelli $280,000 $280,000 $280,000 Less: Dividend income ($60,000)(.80) 48,000 Less: Equity income ($190,000)(.80) 152,000 Less: Adjusted Equity income ($152,000 + $4,800 + (.80 $ 158,800 Net income from independent operations - Pacelli 232,000 128,000 121,200 Add: Constructive loss recorded* 4,800 4,800 4,800 Pacelli's contribution to consolidated income 236,800 132,800 126,000 Reported net income of Salez $190,000 Add: Constructive loss recorded** 2,500 Salez's contribution to consolidated income 192,500 0.80 154,000 154,000 154,000 Controlling interest in consolidated net income $390,800 $286,800 $280,000 Noncontrolling interest in consolidated income ($192,500 .20)

$38,500

$38,500

$38,500

*($3,000 .80) = $4,800 or constructive loss divided by 8 years = $38,400/8 years = $4,800 ** Constructive loss divided by 8 years = $20,000/8 = $2,500 Exercise 9-2 December 31, 2011 Cost and Partial Equity 38,400 38,400

Loss on Constructive Retirement of Bonds Discount on Bonds Payable Loss on Constructive Retirement of Bonds Investment in Pacelli Company Bonds

20,000

Bonds Payable Investment in Pacelli Company Bonds

800,000

Complete Equity 38,400 38,400 20,000

20,000

20,000 800,000

800,000

800,000

December 31, 2012 Beginning Retained Earnings - Pacelli Company Discount on Bonds Payable

38,400 38,400

Investment in Salez Discount on Bonds Payable Discount on Bonds Payable Interest Expense (($3,000 + $3,000)

38,400 38,400 4,800 .80)

4,800 4,800

9-4

4,800

Exercise 9-2 (continued) Cost and Partial Equity 16,000 4,000 20,000

Beginning Retained Earnings - Pacelli Noncontrolling Interest Investment in Pacelli Company Bonds Investment in Salez Noncontrolling Interest Investment in Pacelli Company Bonds

16,000 4,000 20,000

Investment in Pacelli Company Bonds Interest Income ($1,250 + $1,250) Interest Income Interest Expense Nominal interest of $100,000

Complete Equity

2,500

2,500 2,500

80,000

2,500 80,000

80,000

80,000

.80 = $80,000

Bonds Payable Investment in Pacelli Company

800,000

800,000 800,000

800,000

December 31, 2013 Cost and Partial Equity 38,400 38,400

Beginning Retained Earnings - Pacelli Discount on Bonds Payable Discount on Bonds Payable Beginning Retained Earnings - Pacelli Interest Expense (($3,000 + $3,000) .80)

9,600 4,800 4,800

Investment in Salez Discount on Bonds Payable Discount on Bonds Payable Investment in Salez Interest Expense (($3,000 + $3,000)

Complete Equity

38,400 38,400 9,600 4,800 4,800

.80)

Beginning Retained Earnings - Pacelli –Noncontrolling Interest Investment in Pacelli Company Bonds

16,000 4,000

Investment in Pacelli Company Bonds Beginning Retained Earnings - Pacelli Noncontrolling Interest Interest Income ($1,250 + $1,250)

5,000

20,000 2,000 500 2,500

9-5

Exercise 9-2 (continued) Cost and Partial Equity Investment in Salez Noncontrolling Interest Investment in Pacelli Company Bonds

16,000 4,000 20,000

Investment in Pacelli Company Bonds Investment in Salez Noncontrolling Interest Interest Income ($1,250 + $1,250) Interest Income Interest Expense Nominal interest of $100,000

Complete Equity

5,000 2,000 500 2,500 80,000

80,000 80,000

80,000

.80 = $80,000

Bonds Payable Investment in Pacelli Company

800,000

800,000 800,000

800,000

Exercise 9-3 Part A Cost of bond investment ($510,000 .90) Par value Unamortized premium ($42,500 ) Carrying value of bonds Percent of bonds purchased (510/850) Carrying value of bonds purchased Total constructive gain Part B Fairfield Company Cost of bond investment Par value Constructive gain

$459,000 510,000 $ 51,000

$459,000 $850,000 34,000 884,000 .60 530,400 $71,400 Weber Company Carrying value of bonds purchased Par value Constructive gain

$530,400 510,000 $ 20,400

Part C June 30 and December 31, 2012 Fairfield Company Cash ($510,000

.10

6 ) 12

25,500

Interest Income

25,500

Investment in Weber Company Bonds Interest Income $51,000 / 8 periods = $6,375

6,375 6,375

9-6

Exercise 9-3 (continued) Weber Company Interest Expense Cash ($850,000

42,500 .10

6 ) 12

42,500

Premium on Bonds Interest Expense $34,000 / 8 periods = $4,250

4,250 4,250

Part D Note: We have provided solutions assuming the use of any of the three methods. Since the schedules start with the same reported income of Fairfield under all three methods, this results in three different consolidated net income numbers. 2011

Partial Complete Cost Method Equity Method Equity Method $275,000 $275,000 $275,000 54,000 171,000

Reported net income - Fairfield Less: Dividend income ($60,000 .90) Less: Equity income ($190,000)(.90) Less: Adjusted Equity income (171,000+51,000 + .9(20,400)) Net income from independent operations – Fairfield Add: Constructive gain on bond retirement Fairfield's contribution to consolidated income Reported net income - Weber $190,000 Add: Constructive gain on bond retirement 20,400 Weber's contribution to consolidated income 210,400 .90 Controlling interest in consolidated net income Noncontrolling interest in consolidated income ($210,400 .10)

9-7

221,000 51,000 272,000

104,000 51,000 155,000

240,360 34,640 51,000 85,640

189,360 $461,360

189,360 $344,360

189,360 $275,000

$21,040

$21,040

$21,040

Exercise 9-3 (continued) 2012

Partial Complete Cost Method Equity Method Equity Method $350,000 $350,000 $350,000 72,000 202,500

Reported net income - Fairfield Less: Dividend income ($80,000 .90) Less Equity income ($225,000)(.90) Less: Adjusted Equity income ($202,500 - $12,750 - (.9)5,100) Net income from independent operations - Fairfield Less: Constructive gain recorded* Fairfield's contribution to consolidated income Reported net income - Weber $225,000 Less: Constructive gain recorded** 5,100 Weber's contribution to consolidated income 219,900 .90 Controlling interest in consolidated net income

278,000 12,750 265,250

147,500 12,750 134,750

185,160 164,840 12,750 152,090

197,910 $463,160

197,910 $332,660

197,910 $350,000

$21,990

$21,990

$21,990

Noncontrolling interest in consolidated income ($219,900 .10) * $6,375

2 = $12,750 or $51,000/4 periods = $12,750

**$4,250

.60 = $2,550; $2,550

2 = $5,100

Exercise 9-4 December 31, 2011 Premium on Bonds Payable ($34,000 .60) Constructive Gain on Bond Retirement

Cost and Partial Equity 20,400 20,400

Investment in Weber Company Bonds Constructive Gain on Bond Retirement Bonds Payable Investment in Weber Company Bonds

51,000

Complete Equity 20,400 20,400 51,000

51,000 510,000

510,000 510,000

9-8

51,000 510,000

Exercise 9-4 (continued) December 31, 2012 Investment in Weber Co. Bonds Beginning Retained Earnings - Fairfield

Cost and Partial Equity 51,000 51,000

Investment in Weber Co. Bonds Investment in Weber Co. Stock

51,000 51,000

Interest Income ($6,375 Investment in Weber Company Bonds

12,750

Premium on Bonds Payable Beginning Retained Earnings - Fairfield Noncontrolling Interest

20,400

12,750 12,750

12,750

18,360 2,040

Premium on Bonds Payable Investment in Weber Co. Stock Noncontrolling Interest

20,400 18,360 2,040

Interest Expense (($4,250 2) .60) Premium on Bonds Payable

5,100

5,100 5,100

Interest Income Interest Expense Bonds Payable Investment in Weber Company Bonds

Complete Equity

51,000

5,100 51,000

51,000 510,000

510,000 510,000

9-9

51,000 510,000

Exercise 9-4 (continued) December 31, 2013 Investment in Weber Co. Bonds Beginning Retained Earnings - Fairfield

Cost and Partial Equity 51,000 51,000

Investment in Weber Co. Bonds Investment in Weber Co. Stock

51,000 51,000

Beginning Retained Earnings – Fairfield Interest Income ($6,375 Investment in Weber Company Bonds

12,750 12,750

12,750 25,500

Investment in Weber Co. Stock Interest Income ($6,375 Investment in Weber Company Bonds

12,750 12,750 12,750 25,500

Premium on Bonds Payable Beginning Retained Earnings - Fairfield Noncontrolling Interest

20,400 18,360 2,040

Premium on Bonds Payable Investment in Weber Co. Stock Noncontrolling Interest

20,400 18,360 2,040

Beginning Retained Earnings – Fairfield Noncontrolling Interest Interest Expense (($4,250 2) .60) Premium on Bonds Payable

4,590 510 5,100 10,200

Investment in Weber Co. Stock Noncontrolling Interest Interest Expense (($4,250 2) .60) Premium on Bonds Payable

4,590 510 5,100 10,200

Interest Income Interest Expense Bonds Payable Investment in Weber Company Bonds

Complete Equity

51,000

51,000 51,000

510,000

510,000 510,000

9 - 10

51,000 510,000

Exercise 9-5 1.

2.

Carrying value of debt - 1/2/2011 Less: Premium amortization - (($5,000/20) Carrying value of debt - 12/31/2011

2 periods)

$505,000 500 $504,500

Stated interest (30% of $500,000 .11) Add: Discount amortization (($10,000/20) Interest revenue

2 periods)

$16,500 1,000 $17,500

3.

Stated interest ($500,000 .11) Less: Premium amortization ($5,000/20)(2) Interest expense

4.

Cost of bond investment (1/2/2011) Add: Discount amortization * Investment account balance - 12/31/2011

* $500,000 par

$55,000 500 $54,500 $140,000 1,000 $141,000

30% less $140,000 paid divided by 10 years = $1,000

9 - 11

Exercise 9-5 (continued) 5.

Reported net income - Peoples Less: Dividend income ($90,000 .80) Independent net income Add: Constructive gain on bond retirement Less: Constructive gain recorded during year Contribution of Peoples to consolidated income Reported net income - Schmidt Less: amortization of difference between implied and book value - COGS Add: Constructive gain on bond retirement ($505,000 - $500,000) .30 = Less: Constructive gain recorded during year Income after adjustment for constructive gain

$300,000 72,000 228,000 10,000 (1,000) 237,000 $320,000 (60,000) 1,500 (150) 261,350 .80

Parent's share of adjusted income Controlling interest in consolidated net income

209,080 $446,080

Computation and Allocation of Difference between Implied and Book Value Acquired Parent Share $900,000 800,000

Purchase price and implied value Less: Book value of equity acquired: Difference between implied and book value Allocated to inventory Balance Goodwill Balance

6.

100,000 (48,000) 52,000 (52,000) -0-

Noncontrolling interest in consolidated income

$261,350

NonEntire Controlling Value Share 225,000 1,125,000 200,000 1,000,000 25,000 (12,000) 13,000 (13,000) -0-

125,000 (60,000) 65,000 (65,000) -0–

.20 = $52,270

Exercise 9-6 Part A Face (Par) value of note Interest ($60,000 .12 Maturity value Less: Discount ($61,800 Proceeds

) .13

)

9 - 12

$60,000 1,800 61,800 1,339 $60,461

Exercise 9-6 (continued) Part B

Notes Receivable Notes Receivable Discounted

Parent Company Dr (Cr) 60,000 (60,000)

Wyatt Corporation Dr (Cr) 60,000 (60,000)

*Elimination entry Notes Receivable Discounted Notes Receivable

Elimination Consolidated Entries Balances Debit Credit Dr (Cr) 60,000* 60,000 60,000* (60,000)

60,000 60,000

The results of th...