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Chapter 7

INTERCOMPANY PROFIT TRANSACTIONS — BONDS
Answers to Questions
1

Intercompany borrowing gives rise to notes or advances receivable from and payable to affiliates, as well as
reciprocal interest receivable and payable accounts and interest income and expense accounts.

2

Direct lending and borrowing transactions do not give rise to unrealized gains and losses. Any income
reported by the lender is precisely reciprocal to an expense reported by the borrower, and the transactions
are complete on the date consummated. Similarly, direct lending and borrowing transactions do not give
rise to unrecognized gains and losses since intercompany amounts received and paid are both realized and
recognized from the viewpoint of the separate legal entities.

3

Constructive gains and losses are gains and losses from the viewpoint of the consolidated entity but not
from the viewpoint of the separate affiliates involved. The purchase of a parent’s outstanding bonds by its
subsidiary at a price below the book value of the bonds on the parent’s books results in a constructive gain.
Although the bonds are not actually retired, they are constructively retired from the viewpoint of the
consolidated entity because they are no longer liabilities of the consolidated entity to outside parties.

4

The book value of the liability is $1,004,700, computed as $1,000,000 plus $10,000 minus $5,300. If an
affiliate purchases half of the bonds at 98, it will record a bond investment of $490,000. From the
viewpoint of the consolidated entity, the purchase of the bonds results in a constructive retirement of
$500,000 par of bonds payable. The constructive gain on the bonds is $12,350 [($1,004,700  50%) –
$490,000].

5

A constructive gain on bonds is a gain for consolidated statement purposes that is not recorded on the
books of the separate affiliates. The affiliates continue to carry the bonds as a liability (issuer) and
investment (purchaser) on their separate books. Alternatively, an unrealized gain on the sale of land is
recorded on the books of the selling affiliate, but it is not recognized as a gain for consolidated statement
purposes because the land is still held within the consolidated entity. Thus, a constructive gain on bonds is
realized and recognized from the viewpoint of the consolidated entity but it is not recognized on the books
of the affiliates. An unrealized gain on the sale of land is recognized on the books of the selling affiliate but
is not realized or recognized from the viewpoint of the consolidated entity.

6

Constructive gains on intercompany bonds are realized and recognized through the interest income and
expense reported on the separate books of the affiliates. The difference between the interest income
reported by the investor and the interest expense reported by the issuer on the intercompany bonds is the
amount of constructive gain recognized in each period. Constructive gains and losses are recognized in the
consolidated financial statements before they are recognized on the books of the affiliates.

7

If a subsidiary purchases parent bonds at a price in excess of book value, a constructive loss results. The
loss is attributed to the parent since it is the parent bonds that are constructively retired. This approach of
associating constructive gains and losses on intercompany bonds with the issuer is consistent with the
procedures used in earlier chapters of associating gains and losses on intercompany sales transactions with
the selling affiliates.

8a

Assume bonds were purchased at the beginning of the current year
10% bonds payable
52,000
Interest income
5,250
Interest payable
2,500
Investment in S bonds
49,000
Interest expense
4,500
Interest receivable
2,500
Constructive gain on bonds
3,750
To eliminate reciprocal bond investment and liability amounts,
reciprocal interest income and expense amounts, reciprocal
interest receivable and payable amounts, and enter the
constructive gain on bonds. The constructive gain is computed as
the $52,500 book value of bonds that were retired for $48,750.

8b

Assume bonds were purchased one year earlier
10% bonds payable
52,000
Interest income
5,250
Interest payable
2,500
Investment in S bonds
49,000
Interest expense
4,500
Interest receivable
2,500
Investment in S stock (90%)
3,375
Noncontrolling interest
375
To eliminate reciprocal bond investment and liability amounts,
reciprocal interest income and expense amounts, reciprocal
interest receivable and payable amounts, and adjust controlling
and noncontrolling interest holdings for constructive gain less
piecemeal recognition. The constructive gain is computed as:
$53,000 book value - $48,500 cost = $4,500 of which $750 was
recognized on the books of the affiliate in the prior year.

9

Separate entries are as follows:
Investment in S
Income from S
To recognize income
subsidiary income.

40,000
40,000
equal

to

80%

of

reported

Investment in S
Income from S

4,000
4,000

To recognize gain on constructive retirement of
bonds (parent’s books).
The full amount of constructive gain on bonds is recognized as
investment income because we assign the full amount to the parent
issuer.

000 6.000  8% Less: Amortization of premium ($48.000 .000 $69.000 11a A constructive gain will result when interest income exceeds interest expense on the bonds that are constructively retired.10 Investment income from subsidiary 75% of subsidiary’s $100.000  1/3)/ 4 years Interest expense on consolidated income statement $632. SOLUTIONS TO EXERCISES Solution E7-1 1 c 2 a 3 4 d a Solution E7-2 1 a Book value of Pan bond’s acquired by Sow ($900.000 $ 20.000 $ 24.000 4. 11b The constructive gain is associated with the parent since the issuer reports interest expense.000 602.000 $ 30. 11c The $200 difference between interest income and expense represents a piecemeal recognition of the constructive gain on the books of the separate companies.000 reported income Less: 75% of $8.000)  2/3 Cost to Sow Constructive gain 2 d Nominal interest on Pan’s remaining outstanding bonds $300.000 + $48.000 constructive loss on retirement of subsidiary bonds Investment income $75.

000 80% $315. $ 76.000 discount)  20% Constructive gain 2 d Par value of bonds payable Less: Unamortized discount ($8.Solution E7-3 1 c Cost of $80.400  25% in 2011. 2011 Book value acquired ($400.000) Book value of bonds Percent outstanding Bonds payable 3 c Constructive gain $2.$8.000 78.000) 394.400 $400.600 .400/4 years  3 years 4 c Nominal interest Add: Amortization of discount Percent outstanding Interest expense 5 b Piecemeal recognition of gain is $2.000 42.000 par of Pal bonds January 1.000 par .000 (6.800 $ 40.$2.400 $ 2.000 80% $ 33.000 2.000 .200 $ 1.

Solution E7-4 1 Controlling Share of Consolidated net income (in thousands) Pat’s separate income Add: Income from Sal Share of Sal’s income ($1.$80)  40% Cost to Sal Add: Piecemeal recognition of loss ($32.000.000  80%) Less: Loss on bonds constructively retired Book value ($2. 2019 (in thousands) Sales Less: Cost of sales Gross profit Add: Gain on constructive retirement of bondsb Less: Operating expenses Operating profit Other Items: Bond interest expensea Consolidated net income a b 315 3 (125) 193 $ (15) 178 Parent’s bond interest expense $25. Book value of parent’s bonds purchased $100.000/4 years) Controlling Share of Consolidated net income 2 $1. .000  20% $ 200 $ 750 (435) Solution E7-5 Pim Corporation and Subsidiary Consolidated Income Statement for the year ended December 31.000 less purchase price $97.000 = $15.000 .000 less interest on bonds held intercompany $10.376 Noncontrolling interest share Sal’s reported income $1.000 gain on constructive retirement.600 $800 $768 800 (32) 8 776 $2.000 = $3.

800) 700 2.800 Solution E7-7 1 2 3 a January 1.000 premium)  20% Constructive gain $391.000.000 b Constructive gain $27.000  .000 par bonds Book value acquired ($2.000  80% outstanding $1.072.000  70% Add: Piecemeal recognition of constructive loss ($4.500 $ 4.000 Income from Son Share of Son’s reported income $7.600 c Book value $2. 2011 cost of $400.000 418.500 247.000/4 years)  70% Income from Son $ $ 4.000 + $90.657.000/5 years  4 years $ 21.000  70% Less: Constructive loss $4.Solution E7-6 1 Constructive loss Cost paid to retire 1/2 of Son’s bonds Book value of bonds retired ($495.900 (2.5) Constructive loss on bond retirement 2 $251.000 $ 27.600 .

625 Bond liability of Par January 1.000 $500.750  40% outstanding 2 4.750 $488.000 + 3. However.875 486.400 Constructive gain $ Consolidated bond interest expense for 2012 Bond interest expense January 1 to July 1 ($500.875 amortization]  40% Consolidated bond interest expense 1c 8.000/4 years  1/2 year) Book value of bonds July 1.000 1. 2012 Par $500.000  8%  1/2 year) + $1.875 Percent purchased by Say 1b 60% Book value of bonds purchased Purchase price $292. 2012 Amortization 2012 December 31. 2012 Amortization for 6 months ($15. . 2012 $485.725 Book Value $485.500 The amounts would not be different if Say had been the issuer and Par the purchaser.250 Consolidated bond liability $488.125 287.000  8%  1/2 year) + $1.750 $ 30.750 $11.750 $195.875 Bond interest expense July 1 to December 31 [($500.875 amortization $ 21.3. the constructive retirement gains would ‘belong’ to Say and would have been allocated to both Par and the noncontrolling interests in Say.000 .000 Discount $15.Solution E7-8 1a Constructive gain Book value of bonds January 1.

030 $ (10) Consolidated interest expense Pin bonds ($5.$100 unamortized discount)  40% Purchase price of $1.000)  10% interest  1/2 year $ 1c Bonds payable at par ($3.Solution E7-9 (amounts in thousands) Subsidiary purchases parent company bonds: 1a Gain on constructive retirement of bonds Book value of Pin’s bonds constructively retired ($5.920 .000 .000) $4. Cost January 2 Add: Amortization ($100.000 par bonds Gain on constructive bond retirement 1b $1.920 Parent purchases subsidiary bonds: Loss on constructive retirement of bonds Sid’s bonds payable ($1.000 + $1.020 1.900 20 $1.900 $ 60 Consolidated interest payable ($3.000 + $20) Price paid by Pin Loss on constructive retirement of bonds $1. 2011 Add: Amortization for 2012 ($100 / 5 years) Book value of bonds payable 520 $4.920.900 20 $4.000 + $1.000  10% interest) + $20 amortization $ 2c None Interest receivable of $50 is eliminated in consolidation. 2d Book value of bonds payable Pin’s bonds December 31.960 1.000 1d None But Sid’s investment in Pin bonds will be $1.000/5 years) 2a 2b 200 $1.

000 + $120)  25% Price paid by Sal Gain from constructive retirement of bonds Working paper entry to eliminate effect of intercompany bond holdings 12% bonds payable 1.000  12%) .000  12%) .000 + $72)  75% outsiders c Bond interest receivable d Bond interest payable $4.030 980 $ 50 Bond interest income None Consolidated balance sheet amounts — December 31.$24]  75% outsiders $ 342 d 4 $1.000  12% interest) + $4 amortization = $124 [($4.054 None $ 180 . 2013 a Investment in Pad bonds b Book value of bonds payable ($4.024 124 Interest incomea Interest payable 60 Investment in Pad bonds 984 Gain on retirement of bonds 50 114 Interest expenseb Interest receivable 60 a b 3 ($1.Solution E7-10 (in thousands) 1 2 Gain from constructive retirement of bonds Book value of bonds purchased by Sal ($4.$24 amortization]  25% intercompany = $114 Consolidated income statement amounts — 2013 a Constructive gain None b Noncontrolling interest share ($600  20%) $ 120 c Bond interest expense [($4.000  12%  75% outsiders  1/2 year None $3.

2012 Purchase price paid by Par Gain on constructive retirement of Saw bonds Amortization of gain on bonds ($217.000 43.000  20%) Less: Piecemeal recognition of constructive gain ($31.000 $ 217.000  20%) Add: Share of constructive gain ($217.Solution E7-11 Preliminary computations: Book value of Saw bonds on January 1.400 (6. 2012 (in thousands) Sales Less: Cost of sales Gross profit Add: Gain from constructive retirement of Saw bonds Less: Operating expenses Consolidated net income Less: Noncontrolling interest share Controlling interest share of NI $1.000 783.000 $ 28.000/7 years) Computation of noncontrolling interest share: Share of Saw’s reported income ($140.800 950 $ $ 850 217 400 667 65.000.000  20%) Noncontrolling interest share $1.200 $ Par Corporation and Subsidiary Consolidated Income Statement for the year ended December 31.8 .000 $ 31.200) 65.2 601.

800 Investment in Sap bonds 105.9(86.000 unamortized at July 1) Investment cost July 1.300 To eliminate intercompany bonds. Interest payable 4.000 $ 98.800a $105. 2011 Less: Book value acquired [$1.000 To eliminate reciprocal interest payable and receivable amounts.000/2) + .000  90%) 8% bonds payable (($1.000 Interest receivable 4.000 balance at December 31  30/36 months = $6. 2011 ($5. . interest income and expense.000 Interest expense 4. Interest payable 4.200 7.13.000 $106.500 Computation of loss on intercompany bonds Balance of investment in bonds at December 31. 3 Consolidation working paper entries at December 31.000 Interest expense 8.000.000 1.Solution E7-12 1 Pub Corporation and Subsidiary.500 discount) Interest income Interest expense ($86. 2011 Interest receivable Investment in Sap bonds Interest payable ($40.($15.000 8% bonds payable 98. December 31. 2011 Add: Amount amortized for July 1 to December 31.800 Consolidation working paper entries at December 31.000 886.000/2) Loss on constructive retirement of bonds a Amounts Appearing in Consolidated Financial Statements 0 0 36.000.000 unamortized discount at December 31  30/36 months)]  10% Loss on constructive retirement of bonds 2 0 81.000 8% bonds payable 99. 2012 Investment in Sap (80%) 5.300 Interest income 6. record constructive loss on retirement.200 Noncontrolling interest(20%) 1.000 To eliminate reciprocal interest payable and receivable amounts.500 Loss on retirement of bonds 7. and to charge the unrecognized portion of the constructive loss at the beginning of the period 80% to the investment in Sap and 20% to the noncontrolling interest.000  90%).000 . 2011 Interest income 3.100 Investment in Sap bonds 103.000 Interest receivable 4. and eliminate intercompany interest income and expense.600 To eliminate intercompany bonds.700 7.

2013 Cash Investment in Pap bonds Interest income To record interest and amortization. 2013 Interest receivable 4.400 Son accounts for its investment in Pap bonds January 2. 8% Pap bonds.400 December 31.000 400 4.000 par.000 8. July 1.000  20%) $ 20.600 .000 Pap accounts for its investment in Son December 31.000) + $2. 3 4.$800 piecemeal recognition of gain.000 + $81.000 $ 2. 4 97. 2013 Investment in Pap bonds 97.Solution E7-13 1 Gain on constructive retirement of bonds Purchase price of bonds Book value Gain on constructive retirement of bonds 2 $ 97.600 8. 2013 Interest expense Cash To record interest payment for 6 months.400 constructive gain .600 Cash To record investment in $100.600 To record income from Son (80%  $100.400 Pap accounts for its bonds payable July 1. December 31.000 8.000 8. 2013 Investment in Son 81. 2013 Interest expense Interest payable To accrue interest for 6 months.000 Controlling share of NI ($400.600 $501. 5 Noncontrolling interest share ($100. 4.600 100.000 Investment in Pap bonds 400 Interest income To accrue interest and record amortization.600) Consolidated net income $481.600 Income from Son 81.

($8.800 Interest income and expense Interest income in consolidated income statement — 2011 Interest expense in consolidated income statement — 2011 $8.700 Interest expense 3.800 for 27 of 36 months ($1.SOLUTIONS TO PROBLEMS Solution P7-1 1 Loss on constructive retirement of bonds Purchase price of $50.800  3/4 year  50%) 3 48.000 Consolidation working paper entries Loss on constructive retirement of bonds 4.400 97.000 Interest receivable To eliminate reciprocal payables and receivables. 2011 0 Interest payable in consolidated balance sheet at December 31.000 . 2011 $ 1.800 0 $ 5.300 To eliminate reciprocal interest income and expense amounts and reciprocal bond investment and liability amounts and enter unrecognized constructive loss.600 $100.800 8% bonds payable 49.100 Interest income 2.500 Interest receivable and payable Interest receivable in consolidated balance sheet at December 31.800 .600 50% Loss on constructive retirement of bonds 2 4 $ 4.000 2.000 par bonds April 1. 1.800  .100 Investment in Pan bonds 52.75) Book value of bonds Intercompany bonds $53. Interest payable 1. 2011 Book value of bonds acquired: Par value Less: Unamortized discount $1.

000 $3.500 unrealized profit in Sat’s December 31.500 2013 $230.000 $2.500 $233.000 constructive loss on purchase of Pew’s bonds in 2014 - 4.000 2014 $255.000 unrealized profit in Sat’s December 31.086.000 $ Total 922.750 + 7.750 depreciation on unrealized profit on equipment in 2013 and 2014 + + 3.750 $1.500 - 5.000 2.000 - 4.000 + 48.000 $1.000 unrealized profit on sale of equipment in 2013 .750 $261.000 + 48.000 - 15.750 $303.500 unrealized profit in 2013 on sale of land upstream  80% - 6.000 + 180. 2012 Inventory + 5.000 + 1.500 $4.000 Pew’s net income $287.000 3.000 .000 $7.000 $15.Solution P7-2 Pew Corporation and Sat Corporation Schedule to Determine Pew’s Net Income and Controlling Share of Consolidated Net Income Pew’s separate income 2011 $250.000 - 6.000 + 44. 2011 Inventory - + 2.500 $5.500 80% of Sat’s net income + 40.15.000 piecemeal recognition of constructive loss in 2014 + 1.000 2012 $187.

000) (76.000 .000 $1.000 Noncontrolling interest share: Net income of Sum $400.$4.000 .000) Add: Gain on constructive retirement of Pad bonds ($400.560.000) Income from Sum $ 300.000 .000  75%) Add: Unrealized profit in beginning inventory of Sum Less: Unrealized profit in ending inventory of Sum Add: Piecemeal recognition of gain on sale of equipment to Pad ($96.000  75%) Less: Unrealized profit in Sum’s ending inventory Less: Unrealized gain on equipment sold to Pad ($96.000 .000 .000 Investment in Sum at December 31.000 recognized)  75% Less: Unrealized gain on sale of land to Sum Less: Unrealized gain on sale of building to Sum ($80.000 Add: Piecemeal recognition of gain on equipment ($96.$376.000 (40.000 (60.000) 24.000) (40.000) 12.Solution P7-3 Income from Sum for 2011: Share of reported income of Sum ($400.$4.000 $ 208.372.000 Sum’s realized income 416.$48.000) 24.000 (60.000 recognized) Add: Gain on constructive retirement of Pad’s bonds Investment in Sum December 31 $1. 2011: Underlying equity in Sum ($2.000 Noncontrolling interest percentage 25% Noncontrolling interest share $104.000 48.000) (76.000/6 years)  75% Less: Unrealized gain on sale of land to Sum Less: Unrealized gain on sale of building to Sum less piecemeal recognition through depreciation ($80.000/6 years) 16.080.000) (36.

600 840 $ 3.244 872 ______ $3.600 840 508 $3.Solution P7-3 (continued) Pad Corporation and Subsidiary Consolidation Working Paper for the year ended December 31.400 $ 320 1.200* Depreciation expense 304* 160* Interest expense Other expenses Consolidated NI Noncontrolling int.888 $ 520 20 400 1.400 240 80 j 20 a 40 d 60 f 40 f 76 e 48 i 1. Dec.400* 1.520 40 80 208 $ 2. 2011 (in thousands) Pad Income Statement Sales Gain on land Gain on building Income from Sum Gain on bonds Cost of sales $ 2.480 Noncontrolling interest January 1 Noncontrolling interest December 31 Consolidated Statements $4.296 $ 640* 840 $ 472 240 460 600 1.320 g b c e f 24 200 48 16 4 24 2.600 480 $ 2.412* $ 444* 80* 424* 984 104* 880 $ 600 240* k $ Retained earnings.296 j 20 g 400 i 1. 31 $ Balance Sheet Cash Bond interest receivable Other receivables Inventories Land Buildings — net Equipment — net Investment in Sum stock Adjustments and Eliminations Sum 75% i 104 400 880 h k a c e h 40 48 48 32 376 $ 2. share Controlling share of NI 80* 184* Retained Earnings Retained earnings — Pad Retained earnings — Sum Controlling share of NI Dividends Investment in Pad bonds Accounts payable Bond interest payable 10% bonds payable Common stock Retained earnings b f f h 200 40 80 208 d 60 880 $ 600 $ 400 $ 400 400 320* 880 640* $ 840 $ 480 108 $ 324 20 120 200 280 720 360 160 320 360 600 560 1.500 g 376 i k 500 24 3.480 $ 200 40 800 1.372 _______ $ 3.000 1.888 .600 e 16 _______ 3.

000 Unrealized profit in ending inventory Combined inventories ($200.Solution P7-4 Preliminary Computations: Acquisition price Implied fair value of She ($640.000) Less: Consolidated inventories Unrealized profit in ending inventory $300.000 $ 20.000 20% $ 11.000) 40.000 Noncontrolling interest share She’s reported net income Less: Depreciation of excess Add: Unrealized profit in beginning inventory Less: Unrealized profit in ending inventory Sher’s realized income Noncontrolling interest percentage Noncontrolling interest share $ 60.000 $ 6.000 / 80%) She’s book value Excess allocated to plant & equipment with 8 year life $ 640.000 (100.000 Consolidated sales Combined sales Less: Intercompany sales Consolidated sales $560.000 30.000 .000 $330.000 Unrealized profit in beginning inventory Forced computations ($340.000) $ 40.000 + $100.000 $ 220.000 (25.000 100.($100.000 206.000) 55.000 280.000 Consolidated cost of goods sold Combined cost of goods sold Less: Intercompany sales Less: Unrealized profits in beginning inventory Add: Unrealized profits in ending inventory Consolidated cost of goods sold $ 340.000) (40.000 premium) Loss on retirement of bonds $212.000 + $6.000 Consolidated accounts receivable Combined accounts receivable ($240.000) .000 $460.000 (20.000 Loss is from the constructive retirement of bonds Purchase price of bonds Book value of bonds ($200.000) $ 200.000 / 8 years) $ 1 2 3 4 5 6 7 25.000) 20.000 (600.000 $ 800.000 + $20.000) Less: Intercompany receivables Consolidated accounts receivable $360.000 + $120.000 Annual depreciation of excess ($200.000 + $220.

2012 10 Income from She Share of She’s reported net income Less: Depreciation on excess ($200.000) $ 40.000 $ 44.000 .000 (4.000) 24.000  80%) Investment in She stock December 31.000/8 years) Add: Unrealized profit in beginning inventory Less: Unrealized profit in ending inventory She’s adjusted and realized income Pet’s 80% controlling share Less: Constructive loss on retirement of bonds ($6.000) Less: Unrealized profit in ending inventory ($20.000 + $125. 2013 Less: Income from She for 2013 Add: Dividends from She ($30.000 (40.000) Pet’s income from She $640.000 $640.000 + $150.000 Alternative computation: Ending equity of She ($700.000 (8.000 per year  2 years Less: Unrealized profit in beginning inventory ($40.000 .000 excess)(  20%) (4. 2013 Beginning noncontrolling interest (($670.$200.000 (40.000 (20. 2012 ($270.000 56.000)  80% Less: 80% of Excess of ($200. 2012 Alternative computation: Investment in She stock December 31.000 . 2012 Investment in She stock at cost Add: Changes in retained earnings to December 31.000  20%) Less: Noncontrolling interest dividends ($30.000) 11.000 unamortized excess)  20%) Less: Unrealized profit in beginning inventory ($40.000 9 Investment in She stock at December 31.$2.000 (25.000 $ 60.000  80%) Investment in She stock December 31.000/8 years) = $20.000  20%) Noncontrolling interest December 31.000) (32.000 $161.000) (6.000  20%) Add: Noncontrolling interest share Noncontrolling interest December 31 $164.000) $624.000) $ 55.Solution P7-4 (continued) 8 Noncontrolling interest December 31. 2013 $161.000 unamortized $165.000 $624.000) 40.

000 combined .000 equipment .000 accumulated depreciation .000  1/2 held outside the consolidated entity) $100.000 profit realized through depreciation of excess) $466.000 .000 less acquisition cost of $91. Since bonds were acquired on December 31.) $ Cost of goods sold ($860.000 gain has been amortized.000 intercompany sales + $10.000 2 Equipment — net ($800.000 5 Common stock (Poe’s stock) $100.000 9 10 11 9.000 3 Investment in Saw does not appear in consolidated statements.000 combined . 4 Bonds payable (Saw’s bonds payable of $200.000 6 Beginning retained earnings (Poe’s retained earnings) $272.000) $ 38.000 unrealized profit + $7.depreciation on the unrealized gain $7.$21.000) $ 65.000 Interest expense (Saw paid interest for the entire year to outside entities so all of Saw’s interest is reported) $ 16.000.000 unrealized profit in ending inventory) $810.$60. 2011.000 7 Dividends paid (Poe’s dividends) $ 80. none of the $9.000 8 Gain on retirement of bonds (Book value of Saw’s bonds acquired by Poe $100.000 + $15.$320.Solution P7-5 [AICPA adapted] 1 Consolidated cash ($50.000 Depreciation expense ($45.

000/6 years)  75% Less: Unrealized gain on sale of land to Sal Less: Unrealized gain on sale of building to Sal less piecemeal recognition through depreciation ($20.000/6 years) Sal’s realized income Noncontrolling interest percentage Noncontrolling interest share $100.000 .000 (15.000 .000 .000) 6.000 recognized)  75% Less: Unrealized gain on sale of land to Sal Less: Unrealized gain on sale of building to Sal ($20.000) (10.000) Add: Gain on constructive retirement of Par bonds ($100.000) (19.000) Income from Sal for 2012 $ 75.000 (15.Solution P7-6 Income from Sal for 2012: Share of reported income of Sal ($100.000 .000 4.000 recognized) Add: Gain on constructive retirement of Par’s bonds Investment in Sal December 31 $390.000  75%) Add: Unrealized profit in beginning inventory of Sal Less: Unrealized profit in ending inventory of Sal Add: Piecemeal recognition of gain on sale of equipment to Par ($24.$1.000) 3.$1.000 $343.000 12.000 104.000 .000 Investment in Sal at December 31.000) (9.000  75%) Less: Unrealized profit in Sal’s ending inventory Less: Unrealized gain on equipment sold to Par ($24.000) (19.000 Noncontrolling interest share: Net income of Sal Add: Piecemeal recognition of gain on equipment ($24.$94.000 25% $ 26.$12.000) 6.000 $ 52. 2012: Underlying equity in Sal ($520.000 (10.

2012 (in thousands) Par Income Statement Sales Gain on plant Income from Sal Gain on bonds Cost of sales 500 b f h 50 30 52 350* 300* d 15 Depreciation expense 76* 40* Interest expense Operating expense Consolidated NI Noncontrolling int.080 60* k $ Consolidated Statements 10 12 12 8 94 600 80 400 120 600 60 20 $ 210 $ 118 j 5 a 10 d 15 f 10 f 19 e 12 i 375 g 94 j 5 g 100 i 400 e 4 _____ 824 160* i 125 k 6 824 60 115 150 311 218 ______ $ 972 $ 130 5 100 400 210 $ 127 972 .Solution P7-6 (continued) Par Corporation and Subsidiary Consolidation Working Papers for the year ended December 31. share Controlling share of NI 20* 46* Retained Earnings Retained earnings — Par Retained earnings — Sal Controlling share of NI Dividends Retained earnings December 31 Balance Sheet Cash Bond interest receivable Other receivables Inventories Land Buildings — net Equipment — net Investment in Sal stock $ 630 30 52 Adjustments and Eliminations Sal 75% $ 220 $ 150 $ 100 $ 100 100 80* 220 160* $ 210 $ 120 $ 27 $ 81 5 30 50 70 180 90 40 80 90 150 140 343 ______ $ 870 Accounts payable $ 50 Bond interest payable 10 10% bonds payable 200 Common stock 400 Retained earnings 210 $ 870 Noncontrolling interest January 1 Noncontrolling interest December 31 Deduct g b c e f 6 50 12 4 1 6 603* $ 111* 20* 106* 246 26* 220 $ 150 $ $ $ 26 i 100 220 h k a c e h Investment in Par bonds * $1.