CHAPTER 8INTERCOMPANY INDEBTEDNESSANSWERS TO QUESTIONSQ8-1A 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.Q8-2A 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.Q8-3When 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.Q8-4Both 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.Q8-5If 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.Q8-6The 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.Q8-7When 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.Q8-8Whenever 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.Q8-9The 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.Q8-10Interest income and interest expense must be eliminated and a loss on bond retirement established in the elimination process. Because the loss is attributed to the subsidiary in this case, consolidated net income will decrease in proportion to the share of common stock held by the parent.Q8-11A constructive gain will be included in the consolidated income statement in this case and consolidated net income will increase by the full amount of the gain since it is assigned to the parent company.Q8-12A direct placement of subsidiary bonds with the parent should have no effect on consolidated income or on income assigned to the noncontrolling shareholders.Q8-13When 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.Q8-14Interest 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.Q8-15A 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 full amount of the difference between interest income and interest expense as these amounts are eliminated in preparing the consolidated statements.Q8-16A constructive loss recorded on the subsidiary's bonds in a prior period means that the interest income recorded by the parent is less than the interest expense recorded by the subsidiary in each of the following periods and that 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.Q8-17On 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.Q8-18The 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.Q8-19*(a)Operating leases require elimination of the rent expense recorded by the lessee and rent revenue recorded by the lessor.(b) Direct financing leases require elimination of the capitalized lease obligations, lease payments receivable, unearned interest, interest income, and interest expense. The eliminating entries must also provide for reinstatement of the leased asset.(c)Sales-type leases involve recognition of a gain or loss by the lessor. Eliminating entries must provide for reinstatement of the asset and establish depreciation expense and accumulated depreciation based on the production cost or purchase price to the lessor. In addition, the capitalized lease obligation, lease payments receivable, unearned interest, interest income, interest expense, and the gain or loss recorded by the lessor must be eliminated.SOLUTIONS TO CASESC8-1 Recognition of Retirement Gains and Lossesa.When Flood purchases the bonds it will establish an investment account on its books and Bradley will establish a bond liability and discount account on its books. No entry is made by Century. When Century purchases the bonds, Century will record an investment and Flood will remove the balance in the investment account and record a gain on the sale. Bradley will make no entry. When Bradley retires the issue, Bradley will remove its liability and unamortized discount and record a loss on bond retirement. Century will remove the bond investment account and record a loss on sale of bonds. Flood will make no entry.b.A constructive loss on bond retirement will be 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 share-holders 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 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 will be made in the years following the repurchase by Bradley.C8-2 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)Snerd apparently paid less than underlying book value to purchase the bonds of the subsidiary if there is a constructive gain on bond retirement 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 both consolidated net income and the income assigned to noncontrolling shareholders.C8-3 Intercompany DebtAnswers to this case can be found in the SEC Forms 10-K filed by the companies and their annual reportsa.Associates First Capital Corporation paid a $1.85 billion dividend to Ford FSG, its parent, of which $1.75 billion was in the form of an intercompany interest bearing note. In 1998, Ford spun off Associates First Capital by distributing the shares to its common stockholders.b.Campbell Soup Company (www.campbellsoup.com) finances its foreign operations with a mix of equity, intercompany debt, and local borrowings.c.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 with many other companies in the same situation hedge their intercompany receivables/payables through foreign currency forward contracts and swaps.d.Hershey's intercompany receivables/payables appear to rise primarily from intercompany purchases and sales of goods.SOLUTIONS TO EXERCISESE8-1 Bond Sale from Parent to Subsidiarya.Journal entries recorded by Humbolt Corporation:January 1, 20X2 Investment in Lamar Corporation Bonds 156,000 Cash 156,000 July 1, 20X2 Cash 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, 20X2 Cash 156,000 Bonds Payable 150,000 Bond Premium 6,000 July 1, 20X2 Interest Expense 4,200 Bond Premium 300 Cash 4,500 December 31, 20X2 Interest Expense 4,200 Bond Premium 300 Interest Payable 4,500 c.Eliminating entries, December 31, 20X2: E(1) Bonds payable 150,000 Premium on Bonds Payable 5,400 Interest 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.E8-2 Computation of Transfer Pricea. $105,000 = $100,000 par value + ($250 x 20 periods) premiumb. $103,500 = $105,000 - ($250 x 6 periods)c. Eliminating entries: E(1) Bonds Payable 100,000 Bond Premium 3,500 Interest Income 11,500 Investment in Nettle Corporation Bonds 103,500 I Interest Expense 11,500 E(2) Interest Payable 6,000 Interest Receivable 6,000 E8-3 Bond Sale at Discounta. $16,800 = [($600,000 x .08) + ($12,000 / 5 years)] x 1/3b. Journal entries recorded by Wood Corporation:January 1, 20X4 Cash 16,000 Interest Receivable 16,000 July 1, 20X4 Cash 16,000 Investment in Carter Company Bonds 800 Interest Income 16,800 $800 = ($400,000 - $392,000)/(5 x 2)December 31, 20X4 Interest Receivable 16,000 Investment in Carter Company Bonds 800 Interest Income 16,800 c. Eliminating entries, December 31, 20X4: E(1) Bonds Payable 400,000 Interest 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) $395,000 = $392,000 + ($800 x 4) $4,800 = $8,000 - ($800 x 4) E(2) Interest Payable 16,000 Interest Receivable 16,000 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 Questions1.aA 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.aThe 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. a 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 Income to noncontrolling interest ($20,000 x .40) (8,000) Consolidated net income $47,100E8-6 Multiple-Choice Questions1. b $230,000 = $200,000 + .60($40,000 + $10,000)2. a $228,800 = $200,000 + .60[$40,000 + $10,000 - ($10,000 / 5 years)]3. b $234,800 = $200,000 + .60($60,000 - $10,000 / 5 years)4. b $234,800 = $200,000 + .60($60,000 - $10,000 / 5 years) The timing of repurchase in the first year does not change the adjustment to income in the second year.5. d $234,000 = $200,000 + ($40,000 x .60) + $10,0006. c $232,000 = $200,000 + ($40,000 x .60) + ($10,000 - $10,000 / 5 years)E8-7 Multiple-Choice Questions1. 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 $30,000 Unrecognized portion of gain on bond retirement ($12,000 - $1,500) 10,500 $40,500 Proportion of stock held by noncontrolling interest x .20 Income to noncontrolling interest $ 8,100E8-8 Constructive Retirement at End of Yeara.Eliminating entries, December 31, 20X5: E(1) Bonds Payable 400,000 Premium on Bonds Payable 9,000 Investment in Able Corporation 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 E(2) Interest Payable 18,000 Interest Receivable 18,000b.Eliminating entries, December 31, 20X6: E(1) Bonds Payable 400,000 Premium on Bonds Payable 8,400 Interest Income 36,200 Investment in Able Corporation 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 E(2) Interest Payable 18,000 Interest Receivable 18,000E8-9 Constructive Retirement at Beginning of Yeara. Eliminating entries, December 31, 20X5: E(1) Bonds Payable 400,000 Premium on Bonds Payable 9,000 Interest Income 36,200 Inv't in Able Corp 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(2) Interest Payable 18,000 Interest Receivable 18,000 b. Eliminating entries, December 31, 20X6: E(1) Bonds Payable 400,000 Premium on Bonds Payable 8,400 Interest Income 36,200 Inv't in Able Corp Bonds 397,200 Interest Expense 35,400 Retained Earnings, January 1 7,200 Noncontrolling Interests 4,800 E(2) Interest Payable 18,000 Interest Receivable 18,000 E8-10 Retirement of Bonds Sold at a Discount Elimination of bond investment at December 31, 20X8: Bonds Payable 300,000 Interest Income 21,240 Loss on Constructive Bond Retirement 2,730 Investment in 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) $291,000 Amortization of discount [($300,000 - $291,0000) / 20 years] x 7 years 3,150 Book value of liability at January 1, 20X8 $294,150E8-11 Loss on Constructive RetirementEliminating entries, December 31, 20X8: E(1) Bonds Payable 100,000 Interest Income 8,000 Loss on Bond Retirement 12,000 Investment in Apple Corporation Bonds 106,000 Discount on Bonds Payable 3,000 Interest Expense 11,000 E(2) Interest Payable 5,000 Interest Receivable 5,000E8-12 Determining the Amount of Retirement Gain or Lossa. 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 $ 15,000b. 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 $ 7,000c. Eliminating entries, December 31, 20X3: E(1) Bonds Payable 100,000 Bond Premium 6,000 Interest Income 4,000 Investment in Downlink Bonds 100,000 Interest Expense 3,000 Gain on Bond Retirement 7,000 E(2) Interest Payable 6,000 Interest Receivable 6,000E8-13 Evaluation of Bond Retirementa. 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 $ 13,000c. Consolidated net income for 20X6 will increase by $8,400: 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) Net increase $12,000 Proportion of ownership held by Parent Company x .70 Increase in consolidated net income $ 8,400d. 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.E8-13 (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 E(2) Interest Payable 11,000 Interest Receivable 11,000 Eliminate intercompany receivable/payable.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 $14,400E8-14 Elimination of Intercorporate Bond Holdingsa. Eliminating entries, December 31, 20X8: 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) E(2) Interest Payable 6,000 Interest Receivable 6,000 Eliminate intercompany receivable/payable.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 $ 6,580c. Eliminating entries, December 31, 20X9: 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) E(2) Interest Payable 6,000 Interest Receivable 6,000 Eliminate intercompany receivable/payable.E8-15* Intercorporate Leasesa. Entries recorded by Thomas during 20X9: (1) Operating lease: Equipment Rental Expense 38,000 Cash 38,000 (2) Capital lease: Equipment under Capital Lease 500,000 Cash 100,000 Capital Lease Obligation 400,000 Record capital lease and initial payment. Interest Expense 32,000 Capital Lease Obligation 27,612 Cash 59,612 Record annual payment on capital lease: $32,000 = ($500,000 - $100,000) x .08 $27,612 = $59,612 - $32,000 Depreciation Expense 50,000 Accumulated Depreciation 50,000 Record depreciation on leased equipment: $500,000 / 10 yearsb. Entries recorded by Bradley during 20X9: (1) Operating lease: Cash 38,000 Equipment Rental Income 38,000 Depreciation Expense 21,000 Accumulated Depreciation 21,000 (2) Direct financing lease: Cash 100,000 Lease Payments Receivable 596,120 Unearned Interest 196,120 Equipment Held for Lease 500,000 Record direct financing lease and initial payment: $596,120 = $59,612 x 10 $196,120 = $696,120 - $500,000 Cash 59,612 Lease Payments Receivable 59,612 Unearned Interest 32,000 Interest Income 32,000E8-15* (continued)c. Elimination entries: E(1) Equipment Rental Income 38,000 Equipment Rental Expense 38,000 Eliminate effects of operating lease. E(2) Equipment 500,000 Equipment under Capital Lease 500,000 Establish owned equipment. E(3) Capital Lease Obligation 372,388 Unearned Interest 164,120 Lease Payments Receivable 536,508 Eliminate intercompany lease obligation: $372,388 = $400,000 - $27,612 $164,120 = $196,120 - $32,000 $536,508 = $596,120 - $59,612 E(4) Interest Income 32,000 Interest Expense 32,000 Eliminate intercompany interest on capital lease.SOLUTIONS TO PROBLEMSP8-16 Consolidation Workpaper with Sale of Bonds to Subsidiarya.Entries recorded by Porter on its investment in Temple: Investment in Temple Corporation Stock 18,000 Income from Subsidiary 18,000 Record equity-method income: $30,000 x .60 Cash 6,000 Investment in Temple Corporation Stock 6,000 Record dividends from Temple: $10,000 x .60b.Entry recorded by Porter on its bonds payable: Interest Expense 6,000 Bond Premium 400 Cash 6,400 Record interest payment: $400 = ($82,000 - $80,000) / 5 yearsc.Entry recorded by Temple on bond investment: Cash 6,400 Interest Income 6,000 Investment in Porter Company Bonds 400P8-16 (continued) d.Eliminating entries, December 31, 20X2: 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 100,000 Retained 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 80,000 Premium on Bonds Payable 1,200 Interest 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)P8-16 (continued) e.Porter Company and Temple CorporationConsolidation WorkpaperDecember 31, 20X2 Porter Temple Eliminations Consol- Item Co. Corp. Debit Credit idated Sales 200,000 114,000 314,000Interest Income 6,000 (4) 6,000Income from Subsidiary 18,000 (1) 18,000 Credits 218,000 120,000 314,000Cost of Goods Sold 99,800 61,000 160,800Depreciation Expense 25,000 15,000 40,000Interest Expense 6,000 14,000 (4) 6,000 14,000Debits (130,800) (90,000) (214,800) 99,200Income to Noncon- trolling Interest (2) 12,000 (12,000)Net Income, carry forward 87,200 30,000 36,000 6,000 87,200Ret. Earnings, Jan. 1 230,000 50,000 (3) 50,000 230,000Net Income, from above 87,200 30,000 36,000 6,000 87,200 317,200 80,000 317,200Dividends Declared (40,000) (10,000) (1) 6,000 (2) 4,000 (40,000)Ret. Earnings, Dec. 31, carry forward 277,200 70,000 86,000 16,000 277,200Cash and Accounts Receivable 80,200 40,000 120,200Inventory 120,000 65,000 185,000Buildings 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 1,105,200Accum. Depreciation 175,000 75,000 250,000Accounts Payable 68,800 41,200 110,000Bonds Payable 80,000 200,000 (4) 80,000 200,000Bond Premium 1,200 (4) 1,200 Common Stock Porter Company 200,000 200,000 Temple Corporation 100,000 (3)100,000Retained Earnings, from above 277,200 70,000 86,000 16,000 277,200Noncontrolling Interest (2) 8,000 (3) 60 000 68,000 Credits 802,200 486,200 267,200 267,200 1,105,200P8-17 Consolidation Workpaper with Sale of Bonds to Parenta.Entries recorded by Mega Corporation on its investment in Tarp Company: Investment in Tarp Company Stock 22,500 Income from Subsidiary 22,500 Record equity-method income: $25,000 x .90 Cash 18,000 Investment in Tarp Company Stock 18,000 Record dividends from Temple: $20,000 x .90b.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 yearsc.Entry recorded by Tarp Company on its bonds payable: Interest Expense 5,200 Bond Premium 800 Cash 6,000P8-17 (continued)d.Eliminating entries, December 31, 20X4: 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 80,000 Retained 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 100,000 Premium on Bonds Payable 1,600 Interest 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)P8-17 (continued) e.Mega Corporation and Tarp CompanyConsolidation WorkpaperDecember 31, 20X4 Mega Tarp Eliminations Consol- Item Corp. Co. Debit Credit idated Sales 140,000 125,000 265,000Interest Income 5,200 (4) 5,200Income from Subsidiary 22,500 (1) 22,500 Credits 167,700 125,000 265,000Cost of Goods Sold 86,000 79,800 165,800Depreciation Expense 20,000 15,000 35,000Interest Expense 16,000 5,200 (4) 5,200 16,000Debits (122,000)(100,000) (216,800) 48,200Income to Noncon- trolling Interest (2) 2,500 (2,500)Net Income, carry forward 45,700 25,000 30,200 5,200 45,700Ret. Earnings, Jan. 1 242,000 50,000 (3) 50,000 242,000Net Income, from above 45,700 25,000 30,200 5,200 45,700 287,700 75,000 287,700Dividends Declared (30,000) (20,000) (1) 18,000 (2) 2,000 (30,000)Ret. Earnings, Dec. 31, carry forward 257,700 55,000 80,200 25,200 257,700Cash and Accounts Receivable 22,000 36,600 58,600Inventory 165,000 75,000 240,000Buildings and Equipment 400,000 240,000 640,000Investment in Tarp Company Stock 121,500 (1) 4,500 (3)117,000Investment in Tarp Company Bonds 101,600 (4)101,600 Debits 810,100 351,600 938,600Accum. Depreciation 140,000 80,000 220,000Accounts Payable 92,400 35,000 127,400Bonds Payable 200,000 100,000 (4)100,000 200,000Bond Premium 1,600 (4) 1,600 Common Stock Mega Corporation 120,000 120,000 Tarp Company 80,000 (3) 80,000Retained Earnings, from above 257,700 55,000 80,200 25,200 257,700Noncontrolling Interest (2) 500 (3) 13 000 13,500Credits 810,100 351,600 261,800 261,800 938,600P8-18 Direct Sale of Bonds to Parenta. Journal entries recorded by Elm Corporation:January 1, 20X3 Cash 2,000 Interest Receivable 2,000 Receive interest on bond investment.July 1, 20X3 Cash 2,000 Investment in Vincent Company Bonds 250 Interest Income 2,250 Record receipt of bond interest: $250 = $5,000 / 20 yearsDecember 31, 20X3 Interest Receivable 2,000 Investment 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 3,000 Investment in Vincent Company Stock 3,000 Record amortization of differential: $3,000 = $45,000 / 15 years Cash 7,000 Investment in Vincent Company Stock 7,000 Record dividends for Vincent: $7,000 = $10,000 x .70b. Journal entries recorded by Vincent Company:January 1, 20X3 Interest Payable 4,000 Cash 4,000 Record interest payment: $4,000 = $100,000 x .04July 1, 20X3 Interest Expense 4,500 Discount on Bonds Payable 500 Cash 4,000 Semiannual payment of interest: $500 = $10,000 / 20 semiannual paymentsP8-18 (continued)December 31, 20X3 Interest Expense 4,500 Discount on Bonds Payable 500 Interest Payable 4,000 Accrue interest expense at year-end.c. Elimination entries, December 31, 20X3: E(1) Income from Subsidiary 18,000 Dividends Declared 7,000 Investment in Vincent Company Stock 11,000 Eliminate income from subsidiary. E(2) Income to Noncontrolling Interest 9,000 Dividends Declared 3,000 Noncontrolling Interest 6,000 Assign income to noncontrolling interest: $9,000 = $30,000 x .30 E(3) Common Stock__Vincent Company 50,000 Retained Earnings, January 1 100,000 Differential 39,000 Investment in Vincent Company 144,000 Noncontrolling Interest 45,000 Eliminate beginning investment balance: $39,000 = $45,000 - ($3,000 x 2 years) $144,000 = .70($50,000 + $100,000) + $39,000 $45,000 = .30($50,000 + $100,000) E(4) Land, Buildings and Equipment (net) 36,000 Operating Expenses 3,000 Differential 39,000 Assign differential and record amortization for period. E(5) Bonds Payable 50,000 Interest 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 (Accounts Receivable) 2,000 Eliminate intercompany receivable/payable. E(7) Retained Earnings 5,600 Noncontrolling Interest 2,400 Land, Buildings and Equipment (net) 8,000 Eliminate profit on intercompany sale of land.P8-18 (continued)d. Elm Corporation and Vincent Company Consolidation Workpaper December 31, 20X3 Elm Vincent Eliminations Consol- Item Corp. Company Debit Credit idated Sales 300,000 200,000 500,000Interest Income 4,500 (5) 4,500Income from Subsidiary 18,000 (1) 18,000 Credits 322,500 200,000 500,000Operating Expenses 198,500 161,000 (4) 3,000 362,500Interest Expense 27,000 9,000 (5) 4,500 31,500Debits (225,500)(170,000) (394,000) 106,000Income to Noncon- trolling Interest (2) 9,000 (9,000)Net Income, carry forward 97,000 30,000 34,500 4,500 97,000Ret. Earnings, Jan. 1 244,000 100,000 (3)100,000 (7) 5,600 238,400Net Income, from above 97,000 30,000 34,500 4,500 97,000 341,000 130,000 335,400Dividends Declared (60,000) (10,000) (1) 7,000 (2) 3,000 (60,000)Ret. Earnings, Dec. 31, carry forward 281,000 120,000 140,100 14,500 275,400Cash and Accounts Receivable 24,500 46,000 (6) 2,000 68,500Inventory 170,000 70,000 240,000Land, Buildings and Equipment (net) 320,000 180,000 (4) 36,000 (7) 8,000 528,000Discount on Bonds Payable 7,000 (5) 3,500 3,500Investment in Vincent Company Bonds 46,500 (5) 46,500Investment in Vincent Company Stock 155,000 (1) 11,000 (3)144,000Differential (3) 39,000 (4) 39,000 Debits 716,000 303,000 840,000Current Liabilities 35,000 33,000 (6) 2,000 66,000Bonds Payable 300,000 100,000 (5) 50,000 350,000Common Stock 100,000 50,000 (3) 50,000 100,000Retained Earnings, from above 281,000 120,000 140,100 14,500 275,400Noncontrolling Interest (7) 2,400 (2) 6,000 (3) 45,000 48,600Credits 716,000 303,000 319,500 319,500 840,000P8-19 Information Provided in Eliminating Entrya.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 $196,700d. 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 $ 7,700e. Consolidated net 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) Proportion of ownership held by Rupp x .75 (1,050) Consolidated net income $68,950f. 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 .25P8-20 Prior Retirement of Bondsa. 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 $102,800b. 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 for 20X5 and 20X6: 20X5 20X6 Operating income reported by Amazing $120,000 $150,000 Amazing's proportionate share of: Net income reported by Broadway 51,000 68,000 Loss on bond retirement ($6,300 x .85) (5,355) Adjustment for excess of interest expense ($9,500) over interest income ($8,600) recorded in 20X6 ($900 x .85) 765 Consolidated net income $165,645 $218,765P8-21 Incomplete Dataa. Purchase price of bonds: Balance reported in bond investment account in excess of par value, December 31, 20X4 ($109,000 - $100,000) $ 9,000 Amount amortized per year ($9,000 / 6 years) 1,500 Premium at date of purchase $ 10,500 Par value 100,000 Purchase price $110,500b. Carrying amount of liability on date of purchase: Bond premium, December 31, 20X4 $ 6,000 Amount amortized per year ($6,000 / 6 years) 1,000 Bond premium, January 1, 20X4 $ 7,000 Par value 100,000 Carrying amount of liability, January 1, 20X4 $107,000c. Income to noncontrolling interest in 20X5: Reported net income of Condor Company $30,000 Adjustment for excess of interest expense over interest income recorded in 20X5 500 $30,500 Proportion of stock held by noncontrolling interest x .30 Income assigned to noncontrolling interest $ 9,150P8-22 Eliminations with Other Comprehensive Income a. Journal entries recorded by Andover: (1) Investment in Chad Company Stock 26,000 Income from Subsidiary 26,000 Record equity-method income. (2) Cash 18,200 Investment in Chad Company Stock 18,200 Record dividends from subsidiary. (3) Investment in Chad Company Stock 9,100 Other Comprehensive Income from Subsidiary (OCI) 9,100 Record Andover's proportionate share of other comprehensive income of subsidiary.b. Eliminating entries: E(1) Income from Subsidiary 26,000 Dividends Declared 18,200 Investment in Chad Company Stock 7,800 Eliminate income from subsidiary. E(2) Income to Noncontrolling Interest 12,250 Dividends Declared 9,800 Noncontrolling Interest 2,450 Assign income to noncontrolling interest: $12,250 = $40,000 Reported net income 6,000 20X7 inventory profit realized in 20X8 (11,000) Unrealized 20X8 inventory profit $35,000 Realized net income x .35 Ownership held $12,250 Income assigned E(3) Other Comprehensive Income from Subsidiary (OCI) 9,100 Investment in Chad Company Stock 9,100 Eliminate other comprehensive income from subsidiary: $9,100 = $14,000 x .65 E(4) Other Comprehensive Income to Noncontrolling Interest 4,900 Noncontrolling Interest 4,900 Assign other comprehensive income to noncontrolling Interest: $4,900 = $14,000 x .35P8-22 (continued) E(5) Common Stock__Chad Company 80,000 Retained Earnings, January 1 90,000 Accumulated Other Comprehensive Income 6,000 Investment in Chad Company Stock 114,400 Noncontrolling Interest 61,600 Eliminate beginning investment balance: $90,000 = $102,000 - ($40,000 - $28,000) $6,000 = $20,000 - $14,000 $114,400 = $176,000 x .65 $61,600 = $176,000 x .35 E(6) Bonds Payable 70,000 Interest Income 3,800 Investment in Andover Corporation Bonds 67,000 Interest Expense 3,500 Gain on Bond Retirement 3,300 Eliminate intercompany bond holdings: $3,800 = ($70,000 x .10 x 1/2) + [($3,300 / 5.5 years) x 1/2] $67,000 = $66,700 + [($3,300 / 5.5 years) x 1/2] $3,500 = $70,000 x .10 x 1/2 $3,300 = $70,000 - $66,700 E(7) Retained Earnings 3,900 Noncontrolling Interest 2,100 Cost of Goods Sold 6,000 Eliminate beginning inventory profit of Chad Company: $6,000 = $18,000 - ($18,000 / 1.5) E(8) Sales 96,000 Cost of Goods Sold 85,000 Inventory 11,000 Eliminate intercompany sale of inventory by Chad Company: $85,000 = $64,000 + $63,000 - ($63,000 / 1.5) $11,000 = $33,000 - ($33,000 / 1.5)P8-23 Balance Sheet Eliminationsa. Eliminating entries, December 31, 20X4: 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) 4,000P8-23 (continued)b. Bath Corporation and Stang Brewing Company Consolidated 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 1,254,500Accounts 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) 4,800 311,600Noncontrolling Interest (3) 1,200 (1) 54,000 (4) 2,100 54,900Total Credits 960,000 634,000 404,000 404,000 1,254,500c. Bath Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X4 Cash and Receivables $ 242,500 Inventory 332,000 Buildings and Equipment (net) 680,000 Total Assets $1,254,500 Accounts Payable $ 64,000 Bonds Payable $600,000 Bond Premium 24,000 624,000 Noncontrolling Interest 54,900 Common Stock $200,000 Retained Earnings 311,600 511,600 Total Equities $1,254,500P8-24 Computations Relating to Bond Purchase from Nonaffiliatea. 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 $106,200b. Purchase price $106,200 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 Gain on constructive retirement $ 1,550c. Eliminating entries, December 31, 20X4: 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 E(2) Interest Payable 5,000 Interest Receivable 5,000 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 $ 6,750P8-25 Consolidation Procedures [AICPA Adapted]a. Consolidated net income will be: 1.Decreased by $14,000 ($21,000 gain - $7,000 depreciation expense): Gain on Sale of Equipment 21,000 Equipment 6,000 Accumulated Depreciation 8,000 Depreciation Expense 7,000 Eliminate unrealized gain on sale of equipment: $21,000 = $36,000 - $15,000 $6,000 = $36,000 - $30,000 $8,000 = [$15,000 + ($15,000 / 3 years)] - ($36,000 / 3 years) $7,000 = ($36,000 / 3 years) - ($15,000 / 3 years) 2.Decreased by $10,000 ($60,000 Sales - $50,000 cost of goods sold): Sales 60,000 Cost of Goods Sold 50,000 Inventory 10,000 Eliminate intercompany sale of inventory: Cost of goods sold recorded by Shaw $40,000 Cost of goods sold recorded by Poe (1/2 x $60,000) 30,000 Subtotal $70,000 Correct cost of goods sold (1/2 x $40,000) 20,000 Reduction of cost of goods sold $50,000 3. Increased by $9,000 ($100,000 - $91,000).b. Amount reported as goodwill on January 2, 20X2: Price paid to acquire ownership of Shaw $155,000 Book value of net assets held by Shaw $150,000 Proportion of ownership acquired x .90 Net book value of ownership acquired (135,000) Goodwill $ 20,000P8-25 (continued)c. a. 1 b. 2 Reduction of carrying value from $36,000 to $30,000 c. 5 d. 2 Elimination of intercorporate bond ownership e. 6 f. 3 g. 3 h. 3 i. 6 Not recorded by either company j. 2 k. 4 Shaw bonds were not purchased by Poe until year-end l. 2 Reduced for profit on intercompany saleP8-26 Computations following Parent's Acquisition of Subsidiary Bondsa. 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 $ 3,500b. 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 .20c. 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 $501,680P8-27 Consolidation Workpaper__Year of Retirementa. 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 100,000 Retained Earnings, January 1 50,000 Investment in Brown Stock 90,000 Noncontrolling Interest 60,000 Eliminate beginning investment balance. E(4) Bonds Payable 50,000 Bond 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 3,360 Noncontrolling 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)] P8-27 (continued) Tyler Manufacturing and Brown Corporation Consolidation Workpaper December 31, 20X3 Tyler Brown Eliminations Consol- Item Mfg. Corp. Debit Credit idated Sales 400,000 200,000 600,000Income from Subsidiary 18,000 (1) 18,000Gain on Bond Retirement (4) 7,000 7,000Credits 418,000 200,000 607,000Interest Expense 20,000 20,000 40,000Operating Expenses 302,200 150,000 (5) 400 451,800Debits (322,200)(170,000) (491,800) 115,200Income to Noncon- trolling Interest (2) 14,960 (14,960)Net Income, carry forward 95,800 30,000 32,960 7,400 100,240Ret. Earnings, Jan. 1 150,000 50,000 (3) 50,000 (5) 3,360 146,640Net Income, from above 95,800 30,000 32,960 7,400 100,240 245,800 80,000 246,880Dividends Declared (40,000) (10,000) (1) 6,000 (2) 4,000 (40,000)Ret. Earnings, Dec. 31, carry forward 205,800 70,000 86,320 17,400 206,880Cash 68,000 55,000 123,000Accounts Receivable 100,000 75,000 175,000Inventory 120,000 110,000 230,000Depreciable Assets (net) 360,000 210,000 (5) 5,200 564,800Investment in: Brown Bonds 50,000 (4) 50,000 Brown Stock 102,000 (1) 12,000 (3) 90,000 Debits 800,000 450,000 1,092,800Accounts Payable 94,200 52,000 146,200Bonds Payable 200,000 200,000 (4) 50,000 350,000Bond Premium 28,000 (4) 7,000 21,000Common Stock 300,000 100,000 (3)100,000 300,000Retained Earnings, from above 205,800 70,000 86,320 17,400 206,880Noncontrolling Interest (5) 2,240 (2) 10,960 (3) 60,000 68,720Credits 800,000 450,000 245,560 245,560 1,092,800P8-27 (continued)b. Tyler Manufacturing and Subsidiary Consolidated Balance Sheet December 31, 20X3Cash $ 123,000Accounts Receivable 175,000Inventory 230,000Total Current Assets $ 528,000Depreciable Assets (net) 564,800Total Assets $1,092,800Accounts Payable $ 146,200Bonds Payable $350,000Bond Premium 21,000 371,000Noncontrolling Interest 68,720Common Stock $300,000Retained Earnings 206,880 506,880Total Liabilities and Stockholders' Equity $1,092,800 Tyler Manufacturing and Subsidiary Consolidated Income Statement Year Ended December 31, 20X3Sales $600,000Gain on Bond Retirement 7,000Total Revenue $607,000Interest Expense $ 40,000Operating Expenses 451,800Total Expenses 491,800 $115,200Income to Noncontrolling Interest (14,960)Consolidated Net Income $100,240 Tyler Manufacturing and Subsidiary Consolidated Statement of Retained Earnings Year Ended December 31, 20X3Retained Earnings, January 1, 20X3 $146,64020X3 Net Income 100,240 $246,880Less: Dividends Paid in 20X3 (40,000)Retained Earnings, December 31, 20X3 $206,880P8-28 Consolidation Workpaper__Year after Retirementa. Bennett Corporation and Stone Container Company Consolidation Workpaper December 31, 20X4 Bennett Stone Eliminations Consol- Item Corp. Container Debit Credit idated Sales 450,000 250,000 700,000Interest Income 8,000 (4) 8,000Income from Subsidiary 30,000 (1) 30,000 Credits 488,000 250,000 700,000Interest Expense 20,000 18,000 (4) 9,000 29,000Other Expenses 368,600 182,000 550,600Debits (388,600)(200,000) (579,600) 120,400Income to Noncon- trolling Interest (2) 20,400 (20,400)Net Income, carry forward 99,400 50,000 58,400 9,000 100,000Ret. Earnings, Jan. 1 214,200 70,000 (3) 70,000 (4) 4,200 210,000Net Income, from above 99,400 50,000 58,400 9,000 100,000 313,600 120,000 310,000Dividends Declared (40,000) (10,000) (1) 6,000 (2) 4,000 (40,000)Ret. Earnings, Dec. 31, carry forward 273,600 110,000 132,600 19,000 270,000Cash 61,600 20,000 81,600Accounts Receivable 100,000 80,000 180,000Inventory 120,000 110,000 230,000Other Assets 340,000 250,000 590,000Investment 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 1,081,600Accounts Payable 80,000 50,000 130,000Bonds Payable 200,000 200,000 (4)100,000 300,000Common Stock 300,000 100,000 (3)100,000 300,000Retained Earnings, from above 273,600 110,000 132,600 19,000 270,000Noncontrolling Interest (4) 2,800 (2) 16,400 (3) 68,000 81,600Credits 853,600 460,000 335,400 335,400 1,081,600P8-28 (continued) Income from Subsidiary for 20X4: Reported net income of Stone Container $50,000 Proportion of stock held by Bennett x .60 Income from Subsidiary $30,000 Income to Noncontrolling Interest: Reported net income of Stone Container $50,000 Add: 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 $51,000 Proportion of stock held by noncontrolling Interest x .40 Income to Noncontrolling Interest $20,400P8-28 (continued)b. Bennett Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X4Cash $ 81,600Accounts Receivable 180,000Inventory 230,000Total Current Assets $ 491,600Other Assets 590,000Total Assets $1,081,600Accounts Payable $ 130,000Bonds Payable 300,000Noncontrolling Interest 81,600Common Stock $300,000Retained Earnings 270,000 570,000Total Liabilities and Stockholders Equity $1,081,600Bennett Corporation and SubsidiaryConsolidated Income StatementDecember 31, 20X4Sales $700,000Interest Expense $ 29,000Other Expenses 550,600Total Expenses 579,600 $120,400Income to Noncontrolling Interest (20,400)Consolidated Net Income $100,000 Bennett Corporation and Subsidiary Consolidated Statement of Retained Earnings Year Ended December 31, 20X4Retained Earnings, January 1, 20X4 $210,00020X4 Net Income 100,000 $310,000Less: Dividends Paid in 20X4 (40,000)Retained Earnings, December 31, 20X4 $270,000P8-29 Intercorporate Transfers of Inventory and Equipmenta. 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 $794,000b. 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