solusi manual advanced acc zy Chap008

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.

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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.

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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.

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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.

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C8-2 Borrowing by Variable Interest Entities

MEMO

To: PresidentHydro 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

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Case 8-3 Subsidiary Bond Holdings

MEMO

To: Financial Vice-PresidentFarflung 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 400,000Loss 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:

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C8-3 (continued)

E(2) Bonds Payable 400,000Interest Income 30,400(a)Retained Earnings 15,600Noncontrolling 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.

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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.

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SOLUTIONS TO EXERCISES

E8-1 Bond Sale from Parent to Subsidiary

a. Journal entries recorded by Humbolt Corporation:

January 1, 20X2Investment in Lamar Corporation Bonds 156,000 Cash 156,000

July 1, 20X2Cash 4,500 Interest Income 4,200 Investment in Lamar Corporation Bonds 300

December 31, 20X2

Interest Receivable 4,500 Interest Income 4,200 Investment in Lamar Corporation Bonds 300

b. Journal entries recorded by Lamar Corporation:

January 1, 20X2Cash 156,000 Bonds Payable 150,000 Bond Premium 6,000

July 1, 20X2Interest Expense 4,200Bond Premium 300 Cash 4,500

December 31, 20X2Interest Expense 4,200Bond Premium 300 Interest Payable 4,500

c. Eliminating entries, December 31, 20X2:

E(1) Bonds payable 150,000Premium on Bonds Payable 5,400Interest 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.

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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:

E(1) Bonds Payable 100,000Bond Premium 3,500Interest Income 11,500 Investment in Nettle Corporation Bonds 103,500 Interest Expense 11,500

E(2) Interest Payable 6,000 Interest Receivable 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, 20X4Cash 16,000 Interest Receivable 16,000

July 1, 20X4Cash 16,000Investment in Carter Company Bonds 800 Interest Income 16,800 $800 = ($400,000 - $392,000)/(5 x 2)

December 31, 20X4Interest Receivable 16,000Investment in Carter Company Bonds 800 Interest Income 16,800


E(1) Bonds Payable 400,000Interest Income 33,600 Investment in Carter Company Bonds 395,200 Bond Discount 4,800 Interest Expense 33,600 $33,600 = $16,000 + $16,000 + $800 + $800 $395,200 = $392,000 + ($800 x 4) $4,800 = $8,000 - ($800 x 4)


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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

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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 $30,000Unrecognized portion of gain on bond retirement ($12,000 - $1,500) 10,500

$40,500Proportion 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:

E(1) Bonds Payable 400,000Premium on Bonds Payable 9,000 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:

E(1) Bonds Payable 400,000Premium on Bonds Payable 8,400Interest Income 36,200 Investment in Able Company Bonds 397,200 Interest Expense 35,400 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


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E8-8 Constructive Retirement at Beginning of Year


E(1) Bonds Payable 400,000Premium on Bonds Payable 9,000Interest Income 36,200 Investment in Able Company Bonds 397,000 Interest Expense 35,400 Gain on Bond Retirement 12,800 $9,000 = [($400,000 x 1.03) - $400,000] x 15/20 $36,200 = $36,000 + [($400,000 - $396,800)/(16 x 2)] x 2 $397,000 = $396,800 + ($100 x 2) $35,400 = $36,000 - ($300 x 2) $12,800 = [($400,000 x 1.03) - $400,000] x 16/20 + ($400,000 - $396,800)



E(1) Bonds Payable 400,000Premium on Bonds Payable 8,400Interest Income 36,200 Investment in Able Company Bonds 397,200 Interest Expense 35,400 Retained Earnings, January 1 7,200 Noncontrolling Interests 4,800


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E8-9 Retirement of Bonds Sold at a Discount

Elimination of bond investment at December 31, 20X8:

Bonds Payable 300,000Interest Income 21,240Loss on Constructive Bond Retirement 2,730 Investment in Farley Corporation Bonds 297,120 Interest Expense 21,450 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) $291,000Amortization 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:

E(1) Bonds Payable 100,000Interest Income 8,000Loss on Bond Retirement 12,000 Investment in Apple Corporation Bonds 106,000 Discount on Bonds Payable 3,000 Interest Expense 11,000


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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


E(1) Bonds Payable 100,000Bond Premium 6,000Interest Income 4,000 Investment in Downlink Bonds 100,000 Interest Expense 3,000 Gain on Bond Retirement 7,000


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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 )Gain on bond retirement $ 13,000

c. Consolidated net income for 20X6 will increase by $12,000:

Gain on bond retirement $ 13,000 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:

E(1) Bonds Payable 200,000 Premium on Bonds Payable 4,800 Interest Income 11,600 Investment in Bundle Company Bonds 192,800 Interest Expense 10,600 Gain on Bond Retirement 13,000 Eliminate intercorporate bond holdings: $4,800 = ($8,000 / 10 years) x 6 years $11,600 = [$22,000 + ($7,800 / 6.5 years)] / 2 $192,800 = $192,200 + [($7,800 / 6.5 years) / 2] $10,600 = ($22,000 - $800) / 2

E(2) Interest Payable 11,000 Interest Receivable 11,000 Eliminate intercompany receivable/payable.

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E8-12 (continued)

e. Eliminating entries, December 31, 20X7:

E(1) Bonds Payable 200,000 Premium on Bonds Payable 4,000 Interest Income 23,200 Investment in Bundle Company Bonds 194,000 Interest Expense 21,200 Retained Earnings, January 1 8,400 Noncontrolling Interest 3,600 Eliminate intercorporate bond holdings: $4,000 = ($8,000 / 10 years) x 5 years $23,200 = $22,000 + ($7,800 / 6.5 years) $194,000 = $192,800 + ($7,800 / 6.5 years) $21,200 = $22,000 - ($8,000 / 10 years) $8,400 = ($13,000 - $1,000) x .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 Adjustment for excess of interest income over interest expense: Interest income $(23,200) Interest expense 21,200 (2,000 )Realized net income $ 48,000 Proportion of ownership held x .30 Income assigned to noncontrolling interest $ 14,400

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E8-13 Elimination of Intercorporate Bond Holdings


E(1) Bonds Payable 100,000 Premium on Bonds Payable 3,000 Interest Income 11,300 Constructive Loss on Bond Retirement 1,400 Investment in Stang Corporation Bonds 104,200 Interest Expense 11,500 Eliminate intercorporate bond holdings: $3,000 = $5,000 - ($500 x 4 years) $11,300 = $12,000 - ($4,900 / 7 years) $1,400 = $104,900 - ($105,000 - $1,500) $104,200 = $104,900 - ($4,900 / 7 years) $11,500 = $12,000 - ($5,000 / 10 years)


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 Income assigned to noncontrolling interest $ 6,580


E(1) Bonds Payable 100,000 Premium on Bonds Payable 2,500 Interest Income 11,300 Retained Earnings, January 1 780 Noncontrolling Interest 420 Investment in Stang Corporation Bonds 103,500 Interest Expense 11,500 Eliminate intercorporate bond holdings: $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)


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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

Investment in Temple Corporation Stock 18,000 Income from Subsidiary 18,000 Record equity-method income: $30,000 x .60

b. Entry recorded by Porter on its bonds payable:

Interest Expense 6,000Bond 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 Interest Income 6,000 Investment in Porter Company Bonds 400

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P8-14 (continued)


E(1) Income from Subsidiary 18,000 Dividends Declared 6,000 Investment in Temple Corporation Stock 12,000 Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 12,000 Dividends Declared 4,000 Noncontrolling Interest 8,000 Assign income to noncontrolling interest: $12,000 = $30,000 x .40

E(3) Common Stock — Temple Corporation 100,000Retained Earnings, January 1 50,000 Investment in Temple Corporation Stock 90,000 Noncontrolling Interest 60,000 Eliminate beginning investment balance: $90,000 = $102,000 - $12,000 $60,000 = ($100,000 + $50,000) x .40

E(4) Bonds payable 80,000Premium on Bonds Payable 1,200Interest income 6,000 Investment in Porter Company Bonds 81,200 Interest expense 6,000 Eliminate intercorporate bond holdings: $1,200 = ($82,000 - $80,000) x 3/5 $81,200 = ($82,000 - $800)

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P8-14 (continued)

e. Porter Company and Temple CorporationConsolidation 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) 6,000Income 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) 90,000Investment 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) 1,200Common Stock Porter Company 200,000 200,000 Temple Corporation 100,000 (3)100,000Retained 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

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8-23


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

Investment in Tarp Company Stock 22,500 Income from Subsidiary 22,500 Record equity-method income: $25,000 x .90

b. Entry recorded by Mega Corporation on its investment in Tarp Company bonds:

Cash 6,000 Interest Income 5,200 Investment in Tarp Company Bonds 800 Record interest payment: $800 = ($104,000 - $100,000) / 5 years

c. Entry recorded by Tarp Company on its bonds payable:

Interest Expense 5,200Bond Premium 800 Cash 6,000

8-24


P8-15 (continued)


E(1) Income from Subsidiary 22,500 Dividends Declared 18,000 Investment in Tarp Company Stock 4,500 Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 2,500 Dividends Declared 2,000 Noncontrolling Interest 500 Assign income to noncontrolling interest: $2,500 = $25,000 x .10

E(3) Common Stock — Tarp Company 80,000Retained Earnings, January 1 50,000 Investment in Tarp Company Stock 117,000 Noncontrolling Interest 13,000 Eliminate beginning investment balance: $117,000 = $121,500 - $4,500 $13,000 = ($80,000 + $50,000) x .10

E(4) Bonds Payable 100,000Premium on Bonds Payable 1,600Interest Income 5,200 Investment in Tarp Company Bonds 101,600 Interest Expense 5,200 Eliminate intercorporate bond holdings: $1,600 = $4,000 x 2/5 $101,600 = $104,000 - ($4,000 x 3/5)

8-25


P8-15 (continued)

e. Mega Corporation and Tarp CompanyConsolidation Workpaper

December 31, 20X4

Mega Tarp Eliminations Consol- Item Corp. Co. Debit Credit idated Sales 140,000 125,000 265,000 Interest Income 5,200 (4) 5,200Income from Subsidiary 22,500 (1) 22,500 Credits 167,700 125,000 265,000 Cost of Goods Sold 86,000 79,800 165,800 Depreciation Expense 20,000 15,000 35,000 Interest Expense 16,000 5,200 (4) 5,200 16,000 Debits (122,000) (100,000) (216,800)Consolidated Net Income 48,200 Income to Noncon- trolling Interest (2) 2,500 (2,500 )Income, carry forward 45,700 25,000 30,200 5,200 45,700

Retained Earnings, Jan. 1 242,000 50,000 (3) 50,000 242,000 Income, from above 45,700 25,000 30,200 5,200 45,700


(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 Buildings and Equipment 400,000 240,000 640,000 Investment in Tarp Company Stock 121,500 (1) 4,500

(3)117,000Investment in Tarp Company Bonds 101,600 (4)101,600 Debits 810,100 351,600 938,600

Accum. Depreciation 140,000 80,000 220,000 Current Payables 92,400 35,000 127,400 Bonds Payable 200,000 100,000 (4)100,000 200,000 Bond Premium 1,600 (4) 1,600Common Stock Mega Corporation 120,000 120,000 Tarp Company 80,000 (3) 80,000Retained 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

8-26


8-27


P8-16 Direct Sale of Bonds to Parent

a. Journal entries recorded by Fern Corporation:

January 1, 20X3Cash 2,000 Interest Receivable 2,000 Receive interest on bond investment.

July 1, 20X3Cash 2,000Investment in Vincent Company Bonds 250 Interest Income 2,250 Record receipt of bond interest: $250 = $5,000 / (10 years x 2)

December 31, 20X3Cash 7,000 Investment in Vincent Company Stock 7,000 Record dividends for Vincent: $7,000 = $10,000 x .70

Interest Receivable (Current Receivables) 2,000Investment in Vincent Company Bonds 250 Interest Income 2,250 Accrue interest income at year-end.

Investment in Vincent Company Stock 21,000 Income from Subsidiary 21,000 Record equity-method income: $21,000 = $30,000 x .70

Income from Subsidiary 2,800 Investment in Vincent Company Stock 2,800 Record amortization of differential: $2,800 = ($56,000 / 14 years) x .70

b. Journal entries recorded by Vincent Company:

January 1, 20X3Interest Payable 4,000 Cash 4,000 Record interest payment: $4,000 = $100,000 x (.08 / 2)

July 1, 20X3Interest Expense 4,500 Discount on Bonds Payable 500 Cash 4,000 Semiannual payment of interest: $500 = $10,000 / 20 semiannual payments

8-28


P8-16 (continued)

December 31, 20X3Interest Expense 4,500 Discount on Bonds Payable 500 Interest Payable (Current Liabilities) 4,000 Accrue interest expense at year-end.

c. Elimination entries, December 31, 20X3:

E(1) Income from Subsidiary 18,200 Dividends Declared 7,000 Investment in Vincent Company Stock 11,200 Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 7,800 Dividends Declared 3,000 Noncontrolling Interest 4,800 Assign income to noncontrolling interest: $7,800 = [$30,000 – ($56,000 / 14 years)] x .30

E(3) Common Stock — Vincent Company 50,000Retained Earnings, January 1 100,000Differential 48,000 Investment in Vincent Company Stock 138,600 Noncontrolling Interest 59,400 Eliminate beginning investment balance: $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) 44,000Operating Expenses 4,000 Differential 48,000 Assign differential and record amortization: $44,000 = $56,000 – ($4,000 x 3 years)

E(5) Bonds Payable 50,000Interest Income 4,500 Investment in Vincent Company Bonds 46,500 Interest Expense 4,500 Discount on Bonds Payable 3,500 Eliminate intercorporate bond holdings: $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 Eliminate intercompany receivable/payable.

E(7) Retained Earnings, January 1 5,600Noncontrolling Interest 2,400 Land, Buildings and Equipment (net) 8,000 Eliminate profit on intercompany sale of land.

8-29


P8-16 (continued)

d. Fern Corporation and Vincent CompanyConsolidation Workpaper

December 31, 20X3

Fern Vincent Eliminations Consol- Item Corp. Company Debit Credit idated

Sales 300,000 200,000 500,000 Interest Income 4,500 (5) 4,500Income from Subsidiary 18,200 (1) 18,200 Credits 322,700 200,000 500,000 Operating Expenses 198,500 161,000 (4) 4,000 363,500 Interest Expense 27,000 9,000 (5) 4,500 31,500 Debits (225,500) (170,000) (395,000)Consolidated Net Income 105,000 Income to Noncon- trolling Interest (2) 7,800 (7,800 )Income, carry forward 97,200 30,000 34,500 4,500 97,200

Retained Earnings, Jan. 1 244,400 100,000 (3)100,000(7) 5,600 238,800

Income, from above 97,200 30,000 34,500 4,500 97,200 341,600 130,000 336,000

Dividends Declared (60,000) (10,000) (1) 7,000 (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) 46,500Investment in Vincent Company Stock 149,800 (1) 11,200

(3)138,600Differential (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

8-30


8-31

Chapter 08 - Intercompany IndebtednessP8-17 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: Par value of bonds outstanding $200,000 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)Gain on bond retirement $ 7,700

e. Consolidated net income for 20X7 after adjustment for bond retirement:

Amount reported without adjustment $ 70,000 Adjustment for excess of interest income over interest expense: Interest income $(18,600) 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:

Bonds Payable 200,000 Premium on Bonds Payable 1,600 Interest Income 18,600 Investment in Gross Corporation Bonds 198,800 Interest Expense 17,200 Retained Earnings, January 1 3,150 Noncontrolling Interest 1,050 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

8-32

Chapter 08 - Intercompany IndebtednessP8-18 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 Discount on Bonds Payable 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 Interest Income 8,600 Annual receipt of interest: $8,600 = [$9,000 - ($2,400 / 6 years)]

d. Bonds Payable 100,000 Loss on Bond Retirement 6,300 Investment in Broadway Company Bonds 102,800 Discount on Bonds Payable 3,500 Eliminate intercorporate bond holdings: $6,300 = $102,800 - [$97,000 - ($3,000 / 6 years)] $102,800 = computed above $3,500 = [$3,000 + ($3,000 / 6 years)]

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)Adjustment for excess of interest expense ($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

8-33

Chapter 08 - Intercompany IndebtednessP8-19 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) $ 9,000Amount amortized per year ($9,000 / 6 years) 1,500 Premium at date of purchase $ 10,500Par value 100,000 Purchase price $110,500

b. Carrying amount of liability on date of purchase:

Bond premium, December 31, 20X4 $ 6,000Amount amortized per year ($6,000 / 6 years) 1,000 Bond premium, January 1, 20X4 $ 7,000Par 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 $ 30,000Adjustment for excess of interest expense over interest income recorded in 20X5 500

$ 30,500Proportion of stock held by noncontrolling interest x .30 Income assigned to noncontrolling interest $ 9,150

Excess of interest expense over interest incomeInterest expense:

($100,000 x .12) - ($10,000 / 10) $11,000Interest income:

($100,000 x .12) – ($10,500 / 7) (10,500)Excess $ 500

8-34

Chapter 08 - Intercompany IndebtednessP8-20 Balance Sheet Eliminations


E(1) Common Stock — Stang Brewing Company 100,000 Retained Earnings 170,000 Investment in Stang Brewing Stock 216,000 Noncontrolling Interest 54,000 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 Noncontrolling Interest 1,200 Inventory 6,000 Eliminate unrealized inventory profit on upstream sale: $6,000 = $26,000 - ($26,000 / 1.30)

E(4) Bonds Payable 100,000 Bond Premium 12,000 Investment in Stang Brewing Bonds 101,500 Retained Earnings 8,400 Noncontrolling Interest 2,100

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 Proportion of stock held by 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

8-35

Chapter 08 - Intercompany IndebtednessP8-20 (continued)

b. Bath Corporation and Stang Brewing CompanyConsolidated Balance Sheet Workpaper

December 31, 20X4

Stang Bath Brewing Eliminations Consol-

Item Corp. Co. Debit Credit idated

Cash and Receivables 122,500 124,000 (5) 4,000 242,500Inventory 200,000 150,000 (2) 12,000

(3) 6,000 332,000Buildings and Equipment (net) 320,000 360,000 680,000Investment 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 64,000Bonds Payable 400,000 300,000 (4)100,000 600,000Bond Premium 36,000 (4) 12,000 24,000Common Stock 200,000 100,000 (1)100,000 200,000Retained Earnings 320,000 170,000 (1)170,000 (4) 8,400

(2) 12,000(3) 4,800 311,600

Noncontrolling Interest (3) 1,200 (1) 54,000 (4) 2,100 54,900

Total Credits 960,000 634,000 404,000 404,000 1,254,500

8-36


c. Bath Corporation and SubsidiaryConsolidated Balance Sheet

December 31, 20X4

Cash and Receivables $ 242,500Inventory 332,000Buildings and Equipment (net) 680,000 Total Assets $1,254,500

Accounts Payable $ 64,000Bonds Payable $600,000Bond Premium 24,000 624,000Stockholders’ Equity: Controlling Interest: Common Stock $200,000 Retained Earnings 311,600 Total Controlling interest $511,600 Noncontrolling Interest 54,900 Total Stockholders’ Equity 566,500 Total Liabilities and Stockholders’ Equity $1,254,500

8-37

Chapter 08 - Intercompany IndebtednessP8-21 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 Purchase price (106,200)Gain on constructive retirement $ 1,550


E(1) Bonds Payable 100,000 Bond Premium 7,000 Interest Income 6,900 Investment in Bliss Company Bonds 105,600 Interest Expense 6,750 Gain on Bond Retirement 1,550

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


8-38

Chapter 08 - Intercompany IndebtednessP8-22 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 Purchase price (44,000)Gain on bond retirement $ 3,500

b. Bonds Payable 40,000 Bond Premium 4,500 Interest Income 3,200 Investment in Offenberg Company Bonds 42,400 Interest Expense 2,500 Retained Earnings, January 1 2,240 Noncontrolling Interest 560 Eliminate intercorporate bond holdings: $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

8-39

Chapter 08 - Intercompany IndebtednessP8-23 Consolidation Workpaper — Year of Retirement

a. Elimination Entries (not required):

E(1) Income from Subsidiary 18,000 Dividends Declared 6,000 Investment in Brown Corporation 12,000 Eliminate income from subsidiary: $18,000 = $30,000 x .60

E(2) Income to Noncontrolling Interest 14,960 Dividends Declared 4,000 Noncontrolling Interest 10,960 Assign income to noncontrolling interest: $14,960 = ($30,000 + $7,000 + $400) x .40

E(3) Common Stock – Brown Corporation 100,000Retained Earnings, January 1 50,000 Investment in Brown Stock 90,000 Noncontrolling Interest 60,000 Eliminate beginning investment balance.

E(4) Bonds Payable 50,000Bond Premium 7,000 Investment in Brown Bonds 50,000 Gain on Bond Retirement 7,000 Eliminate intercorporate bond holdings: $7,000 = $28,000 / 4

E(5) Retained Earnings, January 1 3,360Noncontrolling Interest 2,240 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)]

8-40


Tyler Manufacturing and Brown CorporationConsolidation Workpaper

December 31, 20X3

Tyler Brown Eliminations Consol- Item Mfg. Corp. Debit Credit idated

Sales 400,000 200,000 600,000 Income from Subsidiary 18,000 (1) 18,000Gain 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 )Consolidated Net Income 115,200 Income to Noncon- trolling Interest (2) 14,960 (14,960 )Income, carry forward 95,800 30,000 32,960 7,400 100,240

Ret. Earnings, Jan. 1 150,000 50,000 (3) 50,000(5) 3,360 146,640


Dividends Declared (40,000) (10,000) (1) 6,000 (2) 4,000 (40,000 )


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

Accounts Payable 94,200 52,000 146,200 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 Noncontrolling Interest (5) 2,240 (2) 10,960

(3) 60,000 68,720 Credits 800,000 450,000 245,560 245,560 1,092,800

8-41


b. Tyler Manufacturing and SubsidiaryConsolidated Balance Sheet

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

Accounts Payable $ 146,200 Bonds Payable $350,000Bond Premium 21,000 371,000 Stockholders’ Equity: Controlling Interest: Common Stock $300,000 Retained Earnings 206,880 Total Controlling Interest $506,880 Noncontrolling Interest 68,720 Total Stockholders’ Equity 575,600 Total Liabilities and Stockholders' Equity $1,092,800

Tyler Manufacturing and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X3

Sales $600,000 Gain on Bond Retirement 7,000 Total Revenue $607,000 Interest Expense $ 40,000Operating 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 SubsidiaryConsolidated Statement of Retained Earnings

Year Ended December 31, 20X3

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

8-42

Chapter 08 - Intercompany IndebtednessP8-24 Consolidation Workpaper — Year after Retirement

a. Elimination Entries (not required):

E(1) Income from Subsidiary 30,000 Dividends Declared 6,000 Investment in Stone Container Stock 24,000 Eliminate income from subsidiary: $30,000 = $50,000 x .60

E(2) Income to Noncontrolling Interest 20,400 Dividends Declared 4,000 Noncontrolling Interest 16,400 Assign income to noncontrolling interest:

Income to Noncontrolling Interest:Reported net income of Stone Container

$50,000

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 $51,000Proportion of stock held by noncontrolling interest x .40 Income to Noncontrolling Interest $20,400

E(3) Common Stock – Brown Corporation 100,000Retained Earnings, January 1 70,000 Investment in Brown Stock 102,000 Noncontrolling Interest 68,000 Eliminate beginning investment balance.

E(4) Bonds Payable 100,000Retained Earnings 4,200Noncontrolling Interest 2,800Interest Income 8,000 Investment in Stone Container Bonds 106,000 Interest Expense 9,000 Eliminate intercorporate bond holdings.

8-43


a. Bennett Corporation and Stone Container CompanyConsolidation Workpaper

December 31, 20X4

Bennett Stone Eliminations Consol- Item Corp. Container Debit Credit idated

Sales 450,000 250,000 700,000 Interest Income 8,000 (4) 8,000Income from Subsidiary 30,000 (1) 30,000 Credits 488,000 250,000 700,000 Interest Expense 20,000 18,000 (4) 9,000 29,000 Other Expenses 368,600 182,000 550,600 Debits (388,600) (200,000) (579,600 )Consolidated Net Income 120,400 Income to Noncon- trolling Interest (2) 20,400 (20,400 )Income, carry forward 99,400 50,000 58,400 9,000 100,000

Ret. Earnings, Jan. 1 214,200 70,000 (3) 70,000(4) 4,200 210,000




Cash 61,600 20,000 81,600 Accounts Receivable 100,000 80,000 180,000 Inventory 120,000 110,000 230,000 Other Assets 340,000 250,000 590,000 Investment in Stone Container Bonds 106,000 (4)106,000Investment in Stone Container Stock 126,000 (1) 24,000

(3)102,000 Debits 853,600 460,000 1,081,600

Accounts Payable 80,000 50,000 130,000 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 Noncontrolling Interest (4) 2,800 (2) 16,400

(3) 68,000 81,600 Credits 853,600 460,000 335,400 335,400 1,081,600

8-44


b. Bennett Corporation and SubsidiaryConsolidated Balance Sheet

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

Accounts Payable $ 130,000 Bonds Payable 300,000 Stockholders’ Equity: Controlling Interest: Common Stock $300,000 Retained Earnings 270,000 Total Controlling Interest $570,000 Noncontrolling Interest 81,600 Total Stockholders’ Equity 651,600 Total Liabilities and Stockholders’ Equity $1,081,600

Bennett Corporation and SubsidiaryConsolidated Income Statement

December 31, 20X4

Sales $700,000 Interest Expense $ 29,000Other 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 SubsidiaryConsolidated Statement of Retained Earnings

Year Ended December 31, 20X4

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

8-45

Chapter 08 - Intercompany IndebtednessP8-25 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:

Interest Expense 15,200 Bond Premium 800 Cash 16,000

Computation of interest expensePar 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

8-46


d. Entry to record interest income for Lance Corporation:

Cash 6,400 Investment in Avery Company Bonds 200 Interest Income 6,600

Computation of interest incomeAnnual 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 retirementPar value of bonds outstanding $200,000 Bond premium, December 31, 20X7 $4,800Remaining years’ to maturity ÷ 6Amortization per year $ 800Years’ to maturity at purchase x 8Premium, December 31, 20X5 6,400 Book value of bonds $206,400 Proportion purchased x .40 Book value of bonds purchased $ 82,560 Purchase price (78,400) Constructive gain $ 4,160

f. Eliminating entries:

E(1) Income from Subsidiary 36,000 Dividends Declared 18,000 Investment in Avery Company Stock 18,000 Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 15,620 Dividends Declared 6,000 Noncontrolling Interest 9,620 Assign income to noncontrolling interest: $15,620 = ($48,000 + $15,000 - $520) x .25

8-47


E(3) Common Stock — Avery Company 50,000Retained Earnings, January 1 170,000 Investment in Avery Company Stock 165,000 Noncontrolling Interest 55,000 Eliminate beginning investment balance.

E(4) Retained Earnings, January 1 11,250Noncontrolling Interest 3,750 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 Cost of Goods Sold 51,000 Inventory 9,000 Eliminate intercompany sale of inventory by Lance Corporation.

E(6) Bonds Payable 80,000Bond Premium 1,920Interest Income 6,600 Investment on Avery Company Bonds 78,800 Interest Expense 6,080 Retained Earnings, January 1 2,730 Noncontrolling Interest 910 Eliminate intercorporate bond holdings: $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

8-48


g. Lance Corporation and Avery CompanyConsolidation Workpaper

December 31, 20X7

Lance Avery Eliminations Consol- Item Corp. Co. Debit Credit idated

Sales 750,000 320,000 (5) 60,000 1,010,000 Interest and Other Income 16,000 5,000 (6) 6,600 14,400 Income from Subsidiary 36,000 (1) 36,000 Credits 802,000 325,000 1,024,400 Cost of Goods Sold 620,000 240,000 (4) 15,000

(5) 51,000 794,000 Depreciation Expense 45,000 15,000 60,000 Interest and Other Expenses 35,000 22,000 (6) 6,080 50,920 Debits (700,000) (277,000) (904,920 )Consolidated Net Income 119,480 Income to Noncon- trolling Interest (2) 15,620 (15,620) Income, carry forward 102,000 48,000 118,220 72,080 103,860

Ret. Earnings, Jan. 1 291,700 170,000 (3)170,000 (6) 2,730(4) 11,250 283,180




Cash 37,900 48,800 86,700 Accounts Receivable 110,000 105,000 215,000 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 Buildings and Equipment 500,000 250,000 750,000 Investment in Avery Company Bonds 78,800 (6) 78,800Investment in Avery Company Stock 183,000 (1) 18,000

(3)165,000 Debits 1,196,700 578,800 1,504,700

8-49


Lance Avery Eliminations Consol- Item Corp. Co. Debit Credit idated

Accum. Depreciation 155,000 75,000 230,000Accounts Payable 118,000 35,000 153,000Other Payables 40,000 20,000 60,000Bonds Payable 250,000 200,000 (6) 80,000 370,000Bond Premium 4,800 (6) 1,920 2,880Common Stock Lance Corporation 250,000 250,000 Avery Company 50,000 (3) 50,000Additional Paid-In Capital 40,000 40,000Retained Earnings, from above 343,700 194,000 299,470 98,810 337,040Noncontrolling 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

8-50


8-51


P8-26 Intercorporate Bond Holdings and Other Transfers


E(1) Income from Subsidiary 22,500 Dividends Declared 7,500 Investment in Skate Company Stock 15,000 Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 7,650 Dividends Declared 2,500 Noncontrolling Interest 5,150 Assign income to noncontrolling interest: $7,650 = ($30,000 + $600) x .25

E(3) Common Stock – Skate Company 30,000Additional Paid-In Capital – Skate Company 20,000Retained Earnings, January 1 150,000 Investment in Skate Company Stock 150,000 Noncontrolling Interest 50,000 Eliminate beginning investment balance.

E(4) Buildings and Equipment 60,000Retained Earnings, January 1 15,000 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)

E(5) Retained Earnings, January 1 9,750Noncontrolling Interest 3,250 Land 13,000 Eliminate unrealized profit on land.

8-52


P8-26 (continued)

E(6) Bonds Payable 40,000Interest Income 3,600Retained Earnings, January 1 3,150Noncontrolling Interest 1,050 Investment in Skate Company Bonds 42,400 Interest Expense 4,200 Bond Discount 1,200 Eliminate intercorporate bond holdings: $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.

8-53


P8-26 (continued)

b. Pond Corporation and Skate CompanyConsolidation Workpaper

December 31, 20X8

Pond Skate Eliminations Consol- Item Corp. Co. Debit Credit idated

Sales 450,000 250,000 700,000 Income from Subsidiary 22,500 (1) 22,500Interest Income 18,500 (6) 3,600 14,900 Credits 491,000 250,000 714,900 Cost of Goods Sold 285,000 136,000 421,000 Other Operating Expenses 50,000 40,000 90,000 Depreciation Expense 35,000 24,000 (4) 1,500 57,500 Interest Expense 24,000 10,500 (6) 4,200 30,300 Miscellaneous Expenses 11,900 9,500 21,400 Debits (405,900) (220,000) (620,200 )Consolidated Net Income 94,700 Income to Noncon- trolling Interest (2) 7,650 (7,650 )Income, carry forward 85,100 30,000 33,750 5,700 87,050

Ret. Earnings, Jan. 1 250,400 150,000 (3)150,000(4) 15,000(5) 9,750(6) 3,150 222,500




Cash 53,100 47,000 100,100 Accounts Receivable 176,000 65,000 241,000 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) 42,400Investment 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

8-54


P8-26 (continued)

Pond Skate Eliminations Consol- Item Corp. Co. Debit Credit idated

Accum. Depreciation 185,000 94,000 (4) 73,500 352,500Accounts Payable 65,000 11,000 76,000Interest & Other Payables 45,000 12,000 (7) 2,000 55,000Bonds Payable 300,000 100,000 (6) 40,000 360,000Common Stock Pond Corporation 150,000 150,000 Skate Company 30,000 (3) 30,000Additional Paid-In Capital 155,000 20,000 (3) 20,000 155,000Retained Earnings, from above 305,500 170,000 211,650 15,700 279,550Noncontrolling 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

8-55


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 Proportion of stock held by noncontrolling interest x .20 Income assigned to noncontrolling interest $ 4,620

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 Proportion of stock held by noncontrolling interest x .20 Assigned to noncontrolling interest $ 68,645

10. b $5,625 ($13,125 - $7,500)

8-56


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)

Balance in Investment in Bussman Stock account, January 1, 20X7 $1,197,000 Add: Income from subsidiary, 20X7 90,000 Less: Dividends received ($40,000 x .90) (36,000 ) Balance in Investment in Bussman Stock account, 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

8-57


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

8-58


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:

E(1) Income from Subsidiary 90,000 Dividends Declared 36,000 Investment in Bussman Stock 54,000 Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 9,210 Dividends Declared 4,000 Noncontrolling Interest 5,210 Assign income to noncontrolling interest: $9,210 = [$100,000 + ($24,000 - $6,000) + $4,500 - $5,400 - $25,000] x .10

E(3) Common Stock — Bussman 500,000Premium on Common Stock 280,000Retained Earnings, January 1 470,000Differential 80,000 Investment in Bussman Stock 1,197,000 Noncontrolling Interest 133,000 Eliminate beginning investment balance: $80,000 = $1,280,000 - $1,200,000 $133,000 = ($500,000 + $280,000 + $470,000 + $80,000) x .10

E(4) Land 30,000Goodwill 50,000 Differential 80,000 Assign differential.

E(5) Goodwill Impairment Loss 25,000 Goodwill 25,000 Recognize impairment of goodwill.

E(6) Bonds Payable 200,000 Investment in Topp Bonds 200,000 Eliminate intercompany holdings of Topp bonds.

8-59


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 1,000,000Premium on Bonds Payable 3,000Other 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

E(10) Retained Earnings, January 1 4,050Noncontrolling Interest 450 Cost of Goods Sold 4,500 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 Cost of Goods Sold 72,600 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

8-60


P8-28 (continued)

g. Topp Manufacturing and Bussman CorporationConsolidation Workpaper

December 31, 20X7Topp Eliminations Consol-

Item Corp. Bussman Debit Credit idated

Sales 3,101,000 790,000 (11) 78,000 3,813,000 Income from Subsidiary 90,000 (1) 90,000Other 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)Consolidated Net Income 481,100 Income to NCI (2) 9,210 (9,210 )Income, carry forward 479,000 100,000 347,210 240,100 471,890

Ret. Earnings, Jan. 1 3,033,000 470,000 (3) 470,000(10) 4,050 3,028,950

Income, from above 479,000 100,000 347,210 240,100 471,890 3,512,000 570,000 3,500,840


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)1,197,000Invest. in Bussman Bonds 985,000 (9) 985,000Invest. in Topp Bonds 200,000 (6) 200,000Land 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)1,000,000Premium on Bonds Payable 3,000 (9) 3,000Common 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

8-61


P8-29A Fully Adjusted Equity Method

a. Adjusted trial balance:

Stone Container Bennett Corporation Company

Item Debit Credit Debit Credit

Cash $ 61,600 $ 20,000Accounts Receivable 100,000 80,000Inventory 120,000 110,000Other Assets 340,000 250,000Investment in Stone Container Bonds 106,000Investment in Stone Container Stock 122,400Interest Expense 20,000 18,000Other Expenses 368,600 182,000Dividends Declared 40,000 10,000Accounts Payable $ 80,000 $ 50,000Bonds Payable 200,000 200,000Common Stock 300,000 100,000Retained Earnings 210,000 70,000Sales 450,000 250,000Interest Income 8,000Income from Subsidiary 30,600 Total $1,278,600 $1,278,600 $670,000 $670,000

b. Journal entries recorded by Bennett Corporation:

(1) Cash 6,000 Investment in Stone Container Stock 6,000 Record dividend from Stone Container: $10,000 x .60

(2) Investment in Stone Container Stock 30,000 Income from Subsidiary 30,000 Record equity-method income: $50,000 x .60

8-62


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


E(1) Income from Subsidiary 30,600 Dividends Declared 6,000 Investment in Stone Container Stock 24,600Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 20,400 Dividends Declared 4,000 Noncontrolling Interest 16,400 Assign income to noncontrolling interest: $20,400 = ($50,000 + $1,000) x .40

E(3) Common Stock – Stone Container 100,000 Retained Earnings, January 1 70,000 Investment in Stone Container Stock 102,000 Noncontrolling Interest 68,000 Eliminate beginning investment balance.

E(4) Bonds Payable 100,000 Interest Income 8,000 Investment in Stone Container Stock 4,200 Noncontrolling Interest 2,800 Investment in Stone Container Bonds 106,000 Interest Expense 9,000 Eliminate intercompany bond holdings: $4,200 = $7,000 constructive loss x .60 $2,800 = $7,000 constructive loss x .40

8-63


P8-29A (continued)

d. Bennett Corporation and Stone Container CompanyConsolidation Workpaper

December 31, 20X4


Sales 450,000 250,000 700,000 Interest Income 8,000 (4) 8,000Income from Subsidiary 30,600 (1) 30,600 Credits 488,600 250,000 700,000 Interest Expense 20,000 18,000 (4) 9,000 29,000 Other Expenses 368,600 182,000 550,600 Debits (388,600) (200,000) (579,600 )Consolidated Net Income 120,400 Income to Noncon- trolling Interest (2) 20,400 (20,400 )Income, carry forward 100,000 50,000 59,000 9,000 100,000

Ret. Earnings, Jan. 1 210,000 70,000 (3) 70,000 210,000 Income, from above 100,000 50,000 59,000 9,000 100,000


(2) 4,000 (40,000 )Ret. Earnings, Dec. 31, carry forward 270,000 110,000 129,000 19,000 270,000

Cash 61,600 20,000 81,600 Accounts Receivable 100,000 80,000 180,000 Inventory 120,000 110,000 230,000 Other Assets 340,000 250,000 590,000 Investment in Stone Container Bonds 106,000 (4)106,000Investment in Stone Container Stock 122,400 (4) 4,200 (1) 24,600

(3)102,000 Debits 850,000 460,000 1,081,600


(3) 68,000 81,600 Credits 850,000 460,000 336,000 336,000 1,081,600

8-64


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 Dividends Declared 6,000 Eliminate dividend income from subsidiary.

E(2) Income to Noncontrolling Interest 20,400 Dividends Declared 4,000 Noncontrolling Interest 16,400 Assign income to noncontrolling interest: $20,400 = ($50,000 + $1,000) x .40

E(3) Common Stock – Stone Container 100,000Retained Earnings, January 1 25,000 Investment in Stone Container Stock 75,000 Noncontrolling Interest 50,000 Eliminate investment balance at date of acquisition: $75,000 = ($100,000 + $25,000) x .60

E(4) Retained Earnings, January 1 18,000 Noncontrolling Interest 18,000 Assign undistributed prior earnings of subsidiary to noncontrolling interest: ($70,000 - $25,000) x .40

E(5) Bonds Payable 100,000Interest Income 8,000Retained Earnings, January 1 4,200Noncontrolling Interest 2,800 Investment in Stone Container Bonds 106,000 Interest Expense 9,000 Eliminate intercompany bond holdings: $4,200 = $7,000 constructive loss x .60 $2,800 = $7,000 constructive loss x .40

8-65


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

8-66


P8-30A (continued)

c. Bennett Corporation and Stone Container CompanyConsolidation Workpaper

December 31, 20X4


Sales 450,000 250,000 700,000 Interest Income 8,000 (5) 8,000Dividend Income 6,000 (1) 6,000 Credits 464,000 250,000 700,000 Interest Expense 20,000 18,000 (5) 9,000 29,000 Other Expenses 368,600 182,000 550,600 Debits (388,600) (200,000) (579,600 )Consolidated Net Income 120,400 Income to Noncon- trolling Interest (2) 20,400 (20,400 )Income, carry forward 75,400 50,000 34,400 9,000 100,000

Ret. Earnings, Jan. 1 187,200 70,000 (3) 25,000(4) 18,000(5) 4,200 210,000




Cash 61,600 20,000 81,600 Accounts Receivable 100,000 80,000 180,000 Inventory 120,000 110,000 230,000 Other Assets 340,000 250,000 590,000 Investment in Stone Container Bonds 106,000 (5)106,000Investment in Stone Container Stock 75,000 (3) 75,000 Debits 802,600 460,000 1,081,600


(3) 50,000 (4) 18,000 81,600

Credits 802,600 460,000 284,400 284,400 1,081,600

8-67

Economy & Finance

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