To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Intercompany Bond Holdings and Miscellaneous Topics— Consolidated Financial Statements Multiple Choice Which of the following methods of allocating the gain or loss on an intercompany bond retirement is the soundest conceptually? a The gain (loss) is allocated to the company that issued the bonds b The gain (loss) is allocated to the company that purchased the bonds c The gain (loss) is allocated to the parent company d The gain (loss) is allocated between the purchasing and issuing companies The constructive gain or loss on an intercompany bond retirement is recognized in the consolidated income statement _ the recognition of the gain or loss on the individual companies' books a after b before c at the same time as d before or after The constructive gain or loss to the purchasing company is the difference between the a book value of the bonds and their par value b book value of the bonds and their purchase price c cost of the bonds and their par value d cost of the bonds and their purchase price The workpaper eliminating entry for a stock dividend declared by the subsidiary includes a a debit to Stock Dividends Declared - S Co b debit to Noncontrolling interest c credit to Stock Dividends Declared - S Co d debit to Dividend Income The parent company records the receipt of shares from a subsidiary's stock dividend as a dividend income b a reduction of the investment account c an increase in the investment account d none of these If the book value of preferred stock is greater than its implied value, the difference is accounted for as an increase in a consolidated retained earnings b consolidated net income c other contributed capital d investment in subsidiary preferred stock http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 9-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition If a subsidiary has both common and preferred stock outstanding, a parent must own a controlling interest in a both the subsidiary's common and preferred stock to justify consolidation b the subsidiary's common stock to justify consolidation c the subsidiary's common stock and at least 20% of the subsidiary's preferred stock to justify consolidation d the subsidiary's common stock and more than 50% of the subsidiary's preferred stock to justify consolidation Use the following information to answer Questions 8, 9, and 10 Pollard Corporation owns 90% of the outstanding common stock of Steele Company On January 1, 2008, Steele Company issued $500,000, 12%, ten-year bonds On January 1, 2010, Pollard Corporation paid $412,000 for Steele Company bonds with a par value of $400,000 and a carrying value of $393,600 Both companies use the straight-line method to amortize bond premiums and discounts Pollard Corporation accounts for the investment using the cost method of accounting The total gain or loss on the constructive retirement of the debt to be reported in the 2010 consolidated income statement is a $12,000 loss b $12,000 gain c $18,400 loss d $18,400 gain e $6,400 loss Pollard Corporation would report a balance in the Investment in Steele Company Bonds account on December 31, 2010, of a $412,000 b $393,600 c $410,500 d $400,000 e none of these 10 Compute the noncontrolling interest in the 2010 consolidated income assuming that Pollard Corporation reported a net income of $300,000 (includes dividend income from Steele Company) Steele Company reported net income of $180,000 and declared and paid cash dividends of $100,000 a $18,000 b $17,440 c $17,360 d $18,560 e none of these http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Intercompany Bond Holdings and Miscellaneous Topics—Consolidated Financial Statements 9-3 11 Sousa Corporation is an 80% owned subsidiary of Phillips Company Sousa purchased bonds of Phillips Company for $103,000 Phillips Company reported the bond liability on the date of purchase at $100,000 less unamortized discount of $5,000 Assuming that the constructive gain or loss is material, the consolidated income statement should report an a ordinary loss of $8,000 b ordinary gain of $8,000 c extraordinary loss of $8,000 adjusted for income tax effects d extraordinary gain of $8,000 adjusted for income tax effects 12 From a consolidated entity point of view, the constructive gain or loss on the open market purchase of a parent company's bonds by a subsidiary company is a considered realized at the date of the open market purchase b realized in future periods through discount and premium amortization on the books of the individual companies c realized only to the extent of the parent company's interest in the subsidiary d deferred and recognized in the consolidated income statement when the bonds are retired 13 Stage Company is a 90% owned subsidiary of Princeton Company On January 1, 2010, Stage Company purchased for $680,000 bonds of Princeton Company that had a carrying value of $725,000 (par value $700,000) The bonds mature on December 31, 2014 Both companies use the straight-line method of amortization and have a December 31 year-end The increase in 2010 consolidated income (i.e., income before subtracting noncontrolling interest) is a $45,000 b $44,000 c $54,000 d $36,000 e $46,000 Use the following information to answer Questions 14 and 15 Parkes Company acquired 90% of Stanton Company's common stock for $780,000 and 40% of its preferred stock for $180,000 On January 1, 2010, the date of acquisition, the companies reported the following account balances: Parkes Company Stanton Company Preferred stock, $100 par value $ 500,000 $ 360,000 Common stock, $10 par value 1,200,000 600,000 Other contributed capital 190,000 140,000 Retained earnings 210,000 110,000 Total stockholders' equity $2,100,000 $1,200,000 The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value equal to 104% of par value Dividends were not paid during 2009 During 2010, Stanton Company reported net income of $120,000 and declared and paid cash dividends in the amount of $70,000 14 The difference between the implied value of the preferred stock and its book value is a $40,000 b $39,600 c $34,400 d $26,000 e 15,840 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 9-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 15 Noncontrolling interest in the 2010 reported net income of Stanton Company is a $29,500 b $12,000 c $34,000 d $21,000 e $30,000 16 Constructive gains and losses from intercompany bond transactions are: a treated as extraordinary items on the consolidated income statement b included as other revenues and expenses on the consolidated income statement c excluded from the consolidated income statement until realized d eliminated from the consolidated income statement 17 Pittsford Company purchased bonds from Shay Company on the open market at a premium Shay Company is a 100% owned subsidiary of Pittsford Company Pittsford intends to hold the bonds until maturity In a consolidated balance sheet, the difference between the bond carrying values in the two companies would be: a included as a decrease to retained earnings b included as an increase to retained earnings c reported as a deferred debit to be amortized over the remaining life of the bonds d reported as a deferred credit to be amortized over the remaining life of the bonds 18 On January 1, 2010, Plueger Company has $700,000 of 6%, 10-year bonds with an unamortized discount of $28,000 Steiner Company, an 80% subsidiary, purchased $350,000 of these bonds at 102 The gain or (loss) on the retirement of Plueger’s bonds is: a $14,000 loss b $14,000 gain c $21,000 loss d $21,000 gain 19 On a consolidated balance sheet, subsidiary preferred stock will be shown: a as part of consolidated stockholder’s equity b combined with any preferred stock of the parent c as part of the noncontrolling interest amount to the extent such balance represents preferred stock held by the parent d as part of the noncontrolling interest amount to the extent such balance represents preferred stock held by outside interests 20 Pettijohn Company has total stockholders’ equity of $2,000,000 consisting of $400,000 of $1 par value common stock, $400,000 of other contributed capital, and $1,200,000 of retained earnings Pettijohn owns 80% of Spencer Company purchased at book value Spencer has $800,000 of 5% cumulative preferred stock outstanding Pettijohn acquired 40% of the preferred stock of Spencer for $200,000 After this transaction the balances in Pettijohn’s retained earnings and other contributed capital accounts are: a $1,200,000 and $400,000 b $1,200,000 and $520,000 c $1,320,000 and $400,000 d $1,080,000 and $400,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Intercompany Bond Holdings and Miscellaneous Topics—Consolidated Financial Statements 9-5 Use the following information to answer Questions 21-23 Parkinson Company owns 90% of the outstanding common stock of Staggs Company On January 1, 2008, Staggs Company issued $500,000, 12%, ten-year bonds On January 1, 2010, Parkinson Company paid $315,000 for Staggs Company bonds with a par value of $300,000 and a carrying value of $297,600 Both companies use the straight-line method to amortize bond premiums and discounts Parkinson Company accounts for the investment using the cost method of accounting 21 The total gain or loss on the constructive retirement of the debt to be reported in the 2010 consolidated income statement is a $15,000 loss b $15,000 gain c $17,400 loss d $17,400 gain e $ 2,400 loss 22 Parkinson Company would report a balance in the Investment in Staggs Company Bonds account on December 31, 2010, of a $315,000 b $297,600 c $313,125 d $300,000 e None of these 23 Compute the noncontrolling interest in the 2010 consolidated income assuming that Parkinson Company reported a net income of $240,000 (includes dividend income from Staggs Company) Staggs Company reported net income of $150,000 and declared and paid cash dividends of $90,000 a $15,000 b $14,790 c $14,760 d $15,210 e None of these Use the following information to answer Questions 24 and 25 Penner Company acquired 90% of Skulley Company's common stock for $1,300,000 and 40% of its preferred stock for $300,000 On January 1, 2010, the date of acquisition, the companies reported the following account balances: Penner Company Skulley Company Preferred stock, $100 par value $ 800,000 $ 600,000 Common stock, $10 par value 2,000,000 1,000,000 Other contributed capital 320,000 230,000 Retained earnings 350,000 180,000 Total stockholders' equity $3,470,000 $2,010,000 The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value equal to 102% of par value Dividends were not paid during 2009 During 2010, Skulley Company reported net income of $200,000 and declared and paid cash dividends in the amount of $120,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 9-6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 24 The difference between the implied value of the preferred stock and its book value is a $60,000 b $78,000 c $55,200 d $36,000 e none of these 25 Noncontrolling interest in the 2010 reported net income of Skulley Company is a $50,000 b $20,000 c $80,000 d $56,000 e none of these http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Intercompany Bond Holdings and Miscellaneous Topics—Consolidated Financial Statements 9-7 Problems 9-1 On January 1, 2010, Page Company acquired an 80% interest in Sterling Company for $1,070,000 Sterling reported common stock of $1,000,000 and retained earnings of $400,000 on this date Any difference between implied value and the book value interest acquired is attributable to land Other information available for Sterling Company is shown below: 2010 Net Income $130,000 Cash Dividends $160,000 Page Company uses the cost method to account for its investment in Sterling Company Required: A Prepare the general journal entries for 2010 to record the receipt of the cash dividends B Prepare in general journal form the workpaper entries necessary in the consolidated statements workpaper for the year end December 31, 2010 9-2 Steinberger Company issued 10-year, 8% bonds with a par value of $1,000,000 on January 2, 2009, for $1,040,000 Interest is payable semiannually on June 30 and December 31 On December 31, 2010, Potts Company purchased $700,000 of Steinberger par value bonds for $670,000 Steinberger is an 80% owned subsidiary of Potts Both companies use the straight-line method to amortize bond discounts and premiums Steinberger declared cash dividends of $100,000 in 2010 and reported net income of $220,000 for the year Potts reported net income of $350,000 for 2010 and paid dividends of $160,000 during 2010 Required: A Compute the total gain or loss on the constructive retirement of the debt B Allocate the total gain or loss between Steinberger Company and Potts Company C Compute the controlling interest in consolidated net income for 2010 D Prepare in general journal form the intercompany bond elimination entries for the consolidated statements workpaper prepared on December 31, 2010 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 9-8 9-3 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Prentice Company, who owns an 80% interest in Steffey Company, purchased $2,000,000 of Steffey’s 8% bonds at 106 on December 31, 2010 The bonds pay interest on January and July and mature on December 31, 2013 Prentice Company uses the cost method to account for its investment in Steffey Selected balances from December 31, 2010 accounts of the two companies are as follows: Prentice Investment in Steffey 8% bonds Bond discount Interest payable 8% bonds payable Interest expense Gain or loss on constructive retirement of bonds $2,120,000 _Steffey $ -300,000 800,000 20,000,000 1,700,000 Required: Prepare in general journal form the workpaper eliminations related to the bonds to consolidated the financial statements of Prentice and its subsidiary for the year ended December 31, 2010 and 2011 9-4 On January 1, 2010, Powell Company purchased 80% of the common stock of Southern Company for $400,000 Southern Company reported common stock of $200,000 ($10 par value), other contributed capital of $60,000, and retained earnings of $120,000 on this date The difference between implied value and the book value interest acquired is attributable to the under-valuation of land held by Southern Company Southern Company reported net income for 2010 of $100,000 During 2010 Southern Company declared and paid a 20% stock dividend and a $24,000 cash dividend Southern Company stock had a market value of $30 per share on the date the stock dividend was declared Powell Company uses the cost method to account for its investment in Southern Company Required: A Prepare the journal entries required in the books of Powell Company to account for the investment in Southern Company B Prepare in general journal form the workpaper entries necessary in the consolidated statements workpaper for the year ended December 31, 2010 C Prepare the workpaper entry to establish reciprocity in the 2011 consolidated statements workpaper http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Intercompany Bond Holdings and Miscellaneous Topics—Consolidated Financial Statements 9-5 9-9 On January 1, 2010, Proctor Company acquired 90% of the common stock of Styles Company for $720,000 and 20% of the preferred stock for $70,000 On this date, Styles Company reported the following account balances: Common stock ($10 par value) Preferred stock ($100 par value, 8%, cumulative, nonparticipating, liquidation value equal to par value) Other contributed capital - premium on common stock Retained earnings $600,000 300,000 120,000 80,000 Styles Company did not declare a cash dividend during 2009 Proctor Company uses the cost method Required: A During 2010 Styles Company reported net income of $360,000 and declared cash dividends of $160,000 Calculate the 2010 noncontrolling interest in net income and the amount of the cash dividends Proctor Company should have received during the year from each of the stock investments B Prepare, in general journal form, the workpaper entries that would be made in the preparation of the December 31, 2010, consolidated statements workpaper The difference between the implied value of the common stock and the book value interest acquired is attributable to an undervaluation in the land of Styles Company Any difference between the implied value of the preferred stock and its book value is allocated to other contributed capital 9-6 On January 1, 2010, Pippin Company acquired 80% of Skylark Company's common stock for $210,000 and 70% of Skylark's preferred stock for $80,000 Skylark Company reported the following stockholders' equity on this date: Preferred stock, 8%, Par value $20 Common stock, Par value $50 Premium on common stock Retained earnings Total $ 100,000 200,000 30,000 80,000 $410,000 The preferred stock is cumulative, nonparticipating, and callable at 104% of par value plus dividends in arrears On January 1, 2010, dividends were in arrears for one year Any difference between the implied value of the preferred stock and its book value interest is to be allocated to other contributed capital Changes in Skylark Company's retained earnings during 2010 and 2011 were as follows: January 1, 2010 Balance 2010 net income 2011 net income 2011 cash dividends December 31, 2011 Balance $ 80,000 20,000 16,000 (30,000) $ 86,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 9-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Required: A Compute the difference between the implied value and book value interest acquired for the investment in preferred stock B Compute the balance in the Investment in Preferred Stock account on December 31, 2011 C Compute the amount of Skylark Company's net income that will be included in the controlling interest in consolidated net income for 2011 9-7 On January 2, 2010, Preston, Inc acquired an 80% interest in Simpson Corporation for $2,250,000 Simpson reported total stockholders’ equity of $2,500,000 on this date An examination of Simpson’s books revealed that book value was equal to fair value for all assets and liabilities except for inventory, which was undervalued by $150,000 All of the undervalued inventory was sold during 2010 Preston also purchased 30% of the $1,250,000 par value outstanding bonds of Simpson Corporation for $350,000 on January 2, 2010 The bonds mature in 10 years, carry an 11% annual interest rate payable on June 30 and December 31, and had a carrying value of $1,270,000 on the date of purchase Both companies use the straight-line method to amortize bond discounts and premiums Preston reported net income of $750,000 for 2010 and paid dividends of $325,000 during 2010 Simpson Corporation reported net income of $800,000 for 2010 and paid dividends of $225,000 during the year Required: Compute the following items at December 31, 2010 Carrying value of the debt Interest revenue reported by Preston, Inc Interest expense reported by Simpson Corporation Balance in the Investment in Simpson Bonds account Controlling interest in consolidated net income for 2010 using the t-account approach Noncontrolling interest in consolidated income for 2010 9-8 On January 2, 2010, Palmer Corporation purchased 80% of the outstanding common stock and 30% of the outstanding cumulative, nonparticipating, preferred stock of Sears Company for $800,000 and $140,000, respectively At this date, Sears Company reported account balances of $800,000 in common stock, $400,000 in preferred stock and $200,000 in retained earnings No other contributed capital accounts exist The difference between implied and book value of the common stock is attributable to under- or overvalued land Dividends on the 12% cumulative preferred stock (par $10) were not paid during 2009 1/2/2010 Retained Earnings 2010 Reported Net Income 2010 Dividends Declared Palmer Corporation $ 90,000 169,200 50,000 http://downloadslide.blogspot.com Sears Company $200,000 180,000 100,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Intercompany Bond Holdings and Miscellaneous Topics—Consolidated Financial Statements 9-11 Required: A Prepare the journal entries made by Palmer Corporation in 2010 to account for the investments assuming the partial equity method is used B Compute the noncontrolling interest in Sears Company’s net income C Prepare the 2010 workpaper entries related to the foregoing investments assuming the partial equity method is used to account for the investment Short Answer Questions from Textbook Define ―constructive retirement of debt.‖ How is the total constructive gain or loss computed? The gain or loss on the constructive retirement of debt is recognized subsequently by the individual companies Explain Allocating the gain or loss on constructive bond retirement between the purchasing and issuing companies is preferred conceptually Describe how this allocation would be made Give the primary argument(s) in favor of assigning the total gain or loss on constructive bond retirement to the company that issued the bonds Under the allocation method followed in this text, how is the noncontrolling interest in consolidated income affected by intercompany bondholdings? Investor Company purchased 70% of the$500,000 par value outstanding bonds of Investee Company, a 70% owned subsidiary The bonds cost $338,000 and had a carrying value of$360,000 on the date of purchase a.What portion of the gain or loss resulting from the constructive bond retirement should be allocated to Investor Company? b What portion of the constructive gain or loss should be allocated to Investee Company? An outside party issued a note to Affiliate X, who then sold the note to Affiliate Y Y discounted the note at an unaffiliated bank, endorsing it with recourse Which party is primarily liable and which party is contingently liable for the note? Cash dividends are viewed as a distribution of the most recent earnings How are stock dividends viewed? Explain how the reciprocity calculation is modified in periods after the declaration of a stock dividend for firms using the cost method 10 What journal entry, if any, would the parent company make to record the receipt of a stock dividend? 11 What effect does a stock dividend have on the consolidated statements work paper in the year of declaration? In subsequent periods? 12 How does the existence of preferred stock affect the calculation of noncontrolling interest? 13 Explain how to account for the difference between implied and book value interest of an investment in preferred stock of a subsidiary http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 9-12 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 14 What effect would cumulative preferred stock have on the allocation of a net loss to the common stockholders? Business Ethics Question from the Textbook The company that you work for is a subsidiary of a larger company At the beginning of each year, the subsidiary prepares a budget for the year that includes a forecast of revenues for the coming year The subsidiary sells a significant amount of inventory to the parent to be used in the manufacture of another product The subsidiary’s revenues for the current year are short of the budgeted amount An error in the books has misclassified an intercompany sale as an ordinary sale The manager of the subsidiary asks you not to fix the error until after the books are closed What is your responsibility? What action, if any, should you take? Why? http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Intercompany Bond Holdings and Miscellaneous Topics—Consolidated Financial Statements 9-13 ANSWER KEY Multiple Choice d b c c d c b 10 11 12 13 14 c c b a a a b 15 16 17 18 19 20 21 e b a c d b c 22 23 24 25 c b b a Problems 9-1 A Cash (160,000 × 0.8) Dividend Income (130,000 × 0.8) Investment in Sterling Company 128,000 B Dividend Income Dividends Declared 104,000 104,000 24,000 104,000 Investment in Sterling Company Dividends Declared 24,000 24,000 Common Stock–Sterling 1,000,000 Beginning R/E–Sterling 400,000 Difference Between Implied and Book Value Investment in Sterling Company Noncontrolling Interest in Equity Difference Between Implied and Book Value Land 9-2 A Cost of bond investment Par value Unamortized prem (40,000 × 16/20) Carrying value of bonds Percent of bonds purchased (700/1,000) Total constructive gain B Potts Company -Cost of bond investment $670,000 Par value Constructive gain 700,000 $ 30,000 62,500 1,070,000 267,500 62,500 62,500 $670,000 $1,000,000 32,000 1,032,000 0.70 722,400 $52,400 Steinberger Company Carrying value of bonds purchased $722,400 Par value 700,000 Constructive gain $ 22,400 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 9-14 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition C 2010 Reported net income – Potts - Dividend income ($100,000 × 0.8) Net income from independent oper – Potts + Constructive gain on bond retirement Potts's contribution to consolidated income Reported net income – Steinberger $220,000 + Constructive gain on bond retirement 22,400 Steinberger’s contribution to consolidated income 242,400 × 0.8 Controlling interest in consolidated net income D December 31, 2010 Investment in Steinberger Co Bonds Constructive Gain on Bond Retirement Premium on Bonds Payable ($32,000 × 0.70) Constructive Gain on Bond Retirement Bonds Payable Investment in Steinberger Co Bonds 9-3 2010 2011 Loss on Constructive Retirement of Bonds Investment in Steffey Company Bonds Loss on Constructive Retirement of Bonds Bond Discount Bonds Payable Investment in Steffey Company Bonds Beginning Retained Earnings-Prentice Investment in Steffey Company Bonds $350,000 - 80,000 270,000 30,000 300,000 193,920 $493,920 30,000 30,000 22,400 22,400 700,000 700,000 120,000 120,000 30,000 30,000 2,000,000 2,000,000 120,000 120,000 Beginning Retained Earnings-Prentice ($30,000 × 0.80) Noncontrolling interest Bond Discount 24,000 6,000 Investment in Steffey Company Bonds ($120,000/3) Interest Revenue 40,000 Bond Discount [($300,000/3) × 0.10] Interest Expense 10,000 Interest Revenue Interest Expense http://downloadslide.blogspot.com 30,000 40,000 10,000 160,000 160,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Intercompany Bond Holdings and Miscellaneous Topics—Consolidated Financial Statements 9-4 Bonds Payable Investment in Steffey Company Bonds Interest Payable Interest Receivable 2,000,000 2,000,000 80,000 80,000 A Investment in Southern Company 400,000 Cash 400,000 Memorandum entry – Received stock dividend of 3,200 shares of Southern Company stock (16,000 × 0.20) Cash 19,200 Dividend Income B Common Stock – Southern Other Contributed Capital – Southern Stock Dividends Declared – Southern Dividend Income Dividends Declared Beginning Retained Earnings – Southern Common Stock – Southern Other Contributed Capital – Southern Difference Between Implied and Book Value Investment in Southern Company Noncontrolling Interest in Equity Land 9-5 9-15 19,200 32,000 64,000 96,000 19,200 19,200 120,000 200,000 60,000 120,000 400,000 100,000 120,000 Difference Between Implied and Book Value 120,000 C Investment in Southern Company 28,800 Beginning Retained Earnings – Powell Company 28,800 A Noncontrolling interest in net income Net income reported by Styles Allocated to preferred stock ($300,000 × 0.08) Residual to common stock Noncontrolling interest in income $360,000 24,000 × 0.80 = 19,200 336,000 × 0.10 = 33,600 $52,800 Cash dividends to Proctor Company Preferred stock dividend ($24,000 × 2) Residual to common stock Total dividends received by Proctor Company $ 48,000 × 0.20 = $ 9,600 112,000 × 0.90 = 100,800 $110,400 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 9-16 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition B Dividend Income Dividends Declared – Preferred Stock Dividends Declared – Common Stock 110,400 9,600 100,800 Beginning Retained Earnings - Styles Company 24,000 Preferred Stock - Styles Company 300,000 Difference Between Implied and Book Value 26,000 Investment in Styles Company Preferred Stock Noncontrolling Interest in Equity 70,000 280,000 Other Contributed Capital—Proctor Company 5,200 Noncontrolling Interest in Equity 20,800 Difference Between Implied and Book Value 26,000 Beginning Retained Earnings – Styles Company 56,000 Common Stock – Styles Company 600,000 Other Contributed Capital – Styles Company 120,000 Difference Between Implied and Book Value 24,000 Investment in Styles Company Common Stock Noncontrolling Interest in Equity 720,000 80,000 Land 24,000 Difference Between Implied and Book Value 9-6 24,000 A Preferred stock Call premium ($100,000 × 4%) Dividends in arrears ($100,000 × 0.08) Book value interest of preferred stock Implied value ($80,000/.7) Difference between implied and book value $100,000 4,000 8,000 112,000 114,286 $ 2,286 B Cost of investment Less: Liquidating dividend ($8,000 × 0.70) Balance – 12/31/10 $80,000 5,600 $74,400 C Preferred stock Common stock ($16,000 - $8,000) Total Net Income $ 8,000 8,000 $16,000 Percentage Controlling interest in Interest Consolidated Income 70 $ 5,600 80 http://downloadslide.blogspot.com 6,400 $12,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Intercompany Bond Holdings and Miscellaneous Topics—Consolidated Financial Statements 9-7 Carrying value of debt – 1/2/2010 $1,270,000 Less: Premium amortization – [($20,000/20) × periods) 2,000 Carrying value of debt – 12/31/2010 $1,268,000 Stated interest (30% of $1,250,000 × 0.11) Add: Discount amortization [($25,000/20) × periods)] Interest revenue Stated interest ($1,250,000 × 0.11) Less: Premium amortization [($20,000/20) × 2] Interest expense $137,500 2,000 $135,500 Cost of bond investment (1/2/2010) Add: Discount amortization* Investment account balance – 12/31/2010 $350,000 2,500 $352,500 9-17 $41,250 2,500 $43,750 *$1,250,000 par × 30% less $350,000 paid divided by 10 years = $2,500 Reported net income – Preston Less: Dividend income ($225,000 × 0.80) Independent net income Add: Constructive gain on bond retirement Less: Constructive gain recorded during year Contribution of Preston to consolidated income Reported net income – Simpson Less: Amortization of difference between implied and book value: Cost of goods sold Add: Constructive gain on bond retirement [($1,270,000 - $1,250,000) × 0.30] = Less: Constructive gain recorded during year Income after adjustment in constructive gain $750,000 180,000 570,000 25,000 (2,500) 592,500 $800,000 (150,000) 650,000 6,000 (600) 655,400 × 0.80 Preston’s share of adjusted income Controlling interest in consolidated net income 524,320 $1,116,820 Implied value of investment ($2,250,000/0.80) Book value of equity acquired Difference between implied and book value Allocated to inventory Goodwill (Excess implied value over fair value) $2,812,500 2,500,000 312,500 150,000 $ 162,500 Noncontrolling interest in consolidated income ($2,250,000/0.80) – $2,250,000 = $562,500 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 9-18 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 9-8 A Investment in Sears Company Preferred Stock Investment in Sears Company Common Stock Cash 140,000 800,000 940,000 Cash (preferred stock) Equity in Subsidiary Income – Preferred Stock Investment in Sears Company Common Stock 28,800 14,400 14,400 Cash 3,200 Investment in Sears Company Common Stock 3,200 Investment in Sears Company Common Stock Equity in Subsidiary Income {[($180,000 – ($400,000 × 0.12)] × (.80)} Arrears Current year Total Percentage interest 105,600 105,600 Preferred Stock $48,000 48,000 96,000 0.30 $28,800 B Reported net income – 2010 Allocation to preferred stock interest ($400,000 × 0.12) Residual to common stock interest Noncontrolling interest in 2010 net income C Investment in Sears Company Preferred Stock Investment in Sears Company Common Stock Dividends Declared – Preferred Stock Common Stock $4,000 4,000 0.80 $3,200 $180,000 48,000 × 0.70 = $33,600 $132,000 × 0.20 = 26,400 $60,000 14,400 14,400 28,800 Equity in Subsidiary Income Dividends Declared – Common Stock Investment in Sears Company Common Stock 105,600 Beginning Retained Earnings – Sears Company Preferred Stock Other Contributed Capital (or Retained Earnings) Investment in Sears Company Preferred Stock Noncontrolling Interest in Equity* 48,000 400,000 5,600 3,200 102,400 140,000 313,600 *($400,000 + $48,000)] × 0.7 = $313,600 Beginning Retained Earnings – Sears Company Common Stock Difference between Implied and Book Value Investment in Sung Company Common Stock Noncontrolling Interest in Equity 152,000 800,000 48,000 http://downloadslide.blogspot.com 800,000 200,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Intercompany Bond Holdings and Miscellaneous Topics—Consolidated Financial Statements 9-19 Short Answer Questions from the Textbook Solutions 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 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 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 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 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 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 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 Stock dividends are viewed as a distribution of the earliest earnings accumulated in the retained earnings account 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 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 9-20 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 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 Business Ethics Case from the Textbook Solution 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 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 http://downloadslide.blogspot.com ... ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 9-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition... ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 9-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition... ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 9-6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition