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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.

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.

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 parents outstanding bonds by its
subsidiary at a price below the book value of the bonds on the parents 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.

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].

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.

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.

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.

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

10

Investment income from subsidiary


75% of subsidiarys $100,000 reported income
Less: 75% of $8,000 constructive loss on retirement of
subsidiary bonds
Investment income

$75,000
6,000
$69,000

11a

A constructive gain will result when interest income exceeds interest


expense on the bonds that are constructively retired.

11b

The constructive gain is associated with the parent since the issuer
reports interest expense.

11c

The $200 difference between interest income and expense represents a


piecemeal recognition of the constructive gain on the books of the
separate companies.

SOLUTIONS TO EXERCISES
Solution E7-1
1
c
2
a

3
4

d
a

Solution E7-2
1
a
Book value of Pan bonds acquired by
Sow ($900,000 + $48,000) 2/3
Cost to Sow
Constructive gain
2
d
Nominal interest on Pans remaining
outstanding bonds $300,000 8%
Less: Amortization of premium ($48,000 1/3)/ 4 years
Interest expense on consolidated income statement

$632,000
602,000
$ 30,000
$ 24,000
4,000
$ 20,000

Solution E7-3
1
c
Cost of $80,000 par of Pal bonds January 1, 2011
Book value acquired ($400,000 par - $8,000 discount) 20%
Constructive gain
2
d
Par value of bonds payable
Less: Unamortized discount ($8,000 - $2,000)
Book value of bonds
Percent outstanding
Bonds payable
3
c
Constructive gain $2,400/4 years 3 years
4
c
Nominal interest
Add: Amortization of discount
Percent outstanding
Interest expense
5

Piecemeal recognition of gain is $2,400 25% in 2011.

$ 76,000
78,400
$ 2,400
$400,000
(6,000)
394,000
80%
$315,200
$

1,800

$ 40,000
2,000
42,000
80%
$ 33,600

Solution E7-4
1

Controlling Share of Consolidated net income (in thousands)


Pats separate income
Add: Income from Sal
Share of Sals income
($1,000 80%)
Less: Loss on bonds constructively
retired
Book value
($2,000 - $80) 40%
Cost to Sal
Add: Piecemeal recognition of loss
($32,000/4 years)
Controlling Share of Consolidated
net income

$1,600
$800

$768
800

(32)
8

776
$2,376

Noncontrolling interest share


Sals reported income
$1,000 20%

200

750
(435)

Solution E7-5
Pim Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 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

Parents bond interest expense $25,000 less interest on bonds held intercompany
$10,000 = $15,000.
Book value of parents bonds purchased $100,000 less purchase price $97,000 =
$3,000 gain on constructive retirement.

Solution E7-6
1

Constructive loss
Cost paid to retire 1/2 of Sons bonds
Book value of bonds retired ($495,000 .5)
Constructive loss on bond retirement

$251,500
247,500
$ 4,000

Income from Son


Share of Sons reported income $7,000 70%
Less: Constructive loss $4,000 70%
Add: Piecemeal recognition of constructive loss
($4,000/4 years) 70%
Income from Son

4,900
(2,800)
700
2,800

Solution E7-7
1

a
January 1, 2011 cost of $400,000 par bonds
Book value acquired ($2,000,000 + $90,000 premium) 20%
Constructive gain

$391,000
418,000
$ 27,000

b
Constructive gain $27,000/5 years 4 years

$ 21,600

c
Book value $2,072,000 80% outstanding

$1,657,600

Solution E7-8
1a

Constructive gain
Book value of bonds January 1, 2012
Amortization for 6 months ($15,000/4 years 1/2 year)
Book value of bonds July 1, 2012

$485,000
1,875
486,875

Percent purchased by Say

1b

60%

Book value of bonds purchased


Purchase price

$292,125
287,400

Constructive gain

Consolidated bond interest expense for 2012


Bond interest expense January 1 to July 1
($500,000 8% 1/2 year) + $1,875 amortization

$ 21,875

Bond interest expense July 1 to December 31


[($500,000 8% 1/2 year) + $1,875 amortization] 40%
Consolidated bond interest expense
1c

8,750
$ 30,625

Bond liability of Par


January 1, 2012
Amortization 2012
December 31, 2012

Par
$500,000
$500,000

Discount
$15,000
- 3,750
$11,250

Consolidated bond liability $488,750 40% outstanding


2

4,725

Book Value
$485,000
+ 3,750
$488,750
$195,500

The amounts would not be different if Say had been the issuer and Par
the purchaser. However, the constructive retirement gains would
belong to Say and would have been allocated to both Par and the
noncontrolling interests in Say.

Solution E7-9 (amounts in thousands)


Subsidiary purchases parent company bonds:
1a
Gain on constructive retirement of bonds
Book value of Pins bonds constructively
retired ($5,000 - $100 unamortized
discount) 40%
Purchase price of $1,000 par bonds
Gain on constructive bond retirement
1b

$1,960
1,900
$
60

Consolidated interest payable


($3,000 + $1,000) 10% interest 1/2 year

1c

Bonds payable at par ($3,000 + $1,000)

$4,000

1d

None But Sids investment in Pin bonds will be $1,920.


Cost January 2
Add: Amortization ($100,000/5 years)

2a

2b

200

$1,900
20
$1,920

Parent purchases subsidiary bonds:


Loss on constructive retirement of bonds
Sids bonds payable ($1,000 + $20)
Price paid by Pin
Loss on constructive retirement of bonds

$1,020
1,030
$ (10)

Consolidated interest expense


Pin bonds ($5,000 10% interest)
+ $20 amortization

2c

None Interest receivable of $50 is eliminated in consolidation.

2d

Book value of bonds payable


Pins bonds December 31, 2011
Add: Amortization for 2012 ($100 / 5 years)
Book value of bonds payable

520

$4,900
20
$4,920

Solution E7-10 (in thousands)


1

Gain from constructive retirement of bonds


Book value of bonds purchased by Sal
($4,000 + $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
1,024
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

($1,000 12% interest) + $4 amortization = $124


[($4,000 12%) - $24 amortization] 25% intercompany = $114

Consolidated income statement amounts 2013


a
Constructive gain

None

Noncontrolling interest share ($600 20%)

120

Bond interest expense


[($4,000 12%) - $24] 75% outsiders

342

d
4

$1,030
980
$
50

Bond interest income

None

Consolidated balance sheet amounts December 31, 2013


a
Investment in Pad bonds
b

Book value of bonds payable


($4,000 + $72) 75% outsiders

Bond interest receivable

Bond interest payable


$4,000 12% 75% outsiders 1/2 year

None
$3,054
None
$

180

Solution E7-11
Preliminary computations:
Book value of Saw bonds on January 1, 2012
Purchase price paid by Par
Gain on constructive retirement of Saw bonds
Amortization of gain on bonds ($217,000/7 years)
Computation of noncontrolling interest share:
Share of Saws reported income ($140,000 20%)
Add: Share of constructive gain ($217,000 20%)
Less: Piecemeal recognition of constructive gain ($31,000 20%)
Noncontrolling interest share

$1,000,000
783,000
$ 217,000
$

31,000

28,000
43,400
(6,200)
65,200

Par Corporation and Subsidiary


Consolidated Income Statement
for the year ended December 31, 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

$1,800
950

$
$

850
217
400
667
65.2
601.8

Solution E7-12
1

Pub Corporation and Subsidiary, December 31, 2011

Interest receivable
Investment in Sap bonds
Interest payable ($40,000 90%)
8% bonds payable (($1,000,000 90%)- 13,500
discount)
Interest income
Interest expense ($86,000/2) + .9(86,000/2)
Loss on constructive retirement of bonds
a

Amounts Appearing
in Consolidated
Financial Statements
0
0
36,000
886,500

Computation of loss on intercompany bonds


Balance of investment in bonds at December 31, 2011
Add: Amount amortized for July 1 to December 31, 2011
($5,000 balance at December 31 30/36 months = $6,000 unamortized
at July 1)
Investment cost July 1, 2011
Less: Book value acquired [$1,000,000 - ($15,000
unamortized discount at December 31 30/36 months)] 10%
Loss on constructive retirement of bonds

0
81,700
7,800a
$105,000

1,000
$106,000

98,200
7,800

Consolidation working paper entries at December 31, 2011


Interest income
3,000
8% bonds payable
98,500
Loss on retirement of bonds
7,800
Investment in Sap bonds
105,000
Interest expense
4,300
To eliminate intercompany bonds, record constructive loss on
retirement, and eliminate intercompany interest income and
expense.
Interest payable
4,000
Interest receivable
4,000
To eliminate reciprocal interest payable and receivable amounts.

Consolidation working paper entries at December 31, 2012


Investment in Sap (80%)
5,200
Noncontrolling interest(20%)
1,300
Interest income
6,000
8% bonds payable
99,100
Investment in Sap bonds
103,000
Interest expense
8,600
To eliminate intercompany bonds, interest income and expense, 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.
Interest payable
4,000
Interest receivable
4,000
To eliminate reciprocal interest payable and receivable amounts.

Solution E7-13
1

Gain on constructive retirement of bonds


Purchase price of bonds
Book value
Gain on constructive retirement of bonds

$ 97,600
100,000
$ 2,400

Son accounts for its investment in Pap bonds


January 2, 2013
Investment in Pap bonds
97,600
Cash
To record investment in $100,000 par, 8% Pap bonds.
July 1, 2013
Cash
Investment in Pap bonds
Interest income
To record interest and amortization.

4,000
400
4,400

December 31, 2013


Interest receivable
4,000
Investment in Pap bonds
400
Interest income
To accrue interest and record amortization.
3

4,400

Pap accounts for its bonds payable


July 1, 2013
Interest expense
Cash
To record interest payment for 6 months.
December 31, 2013
Interest expense
Interest payable
To accrue interest for 6 months.

97,600

8,000
8,000

8,000
8,000

Pap accounts for its investment in Son


December 31, 2013
Investment in Son
81,600
Income from Son
81,600
To record income from Son
(80% $100,000) + $2,400 constructive gain - $800 piecemeal
recognition of gain.

Noncontrolling interest share ($100,000 20%)

$ 20,000

Controlling share of NI ($400,000 + $81,600)


Consolidated net income

$481,600
$501,600

SOLUTIONS TO PROBLEMS
Solution P7-1
1

Loss on constructive retirement of bonds


Purchase price of $50,000 par bonds
April 1, 2011
Book value of bonds acquired:
Par value
Less: Unamortized discount $1,800 for 27
of 36 months ($1,800 .75)
Book value of bonds
Intercompany bonds

$53,600
$100,000
2,400
97,600
50%

Loss on constructive retirement of bonds


2

$ 4,800

Interest income and expense


Interest income in consolidated income statement 2011
Interest expense in consolidated income statement 2011
$8,800 - ($8,800 3/4 year 50%)

48,800

0
$ 5,500

Interest receivable and payable


Interest receivable in consolidated balance sheet
at December 31, 2011

Interest payable in consolidated balance sheet at


December 31, 2011

$ 1,000

Consolidation working paper entries


Loss on constructive retirement of bonds
4,800
8% bonds payable
49,100
Interest income
2,100
Investment in Pan bonds
52,700
Interest expense
3,300
To eliminate reciprocal interest income and expense amounts and
reciprocal bond investment and liability amounts and enter
unrecognized constructive loss.
Interest payable
1,000
Interest receivable
To eliminate reciprocal payables and receivables.

1,000

Solution P7-2
Pew Corporation and Sat Corporation
Schedule to Determine Pews Net Income and Controlling Share of Consolidated
Net Income
Pews separate income

2011
$250,000

2012
$187,500

2013
$230,000

2014
$255,000

Total
922,500

80% of Sats net income

+ 40,000

+ 48,000

+ 44,000

+ 48,000

180,000

$2,500 unrealized profit in


Sats December 31, 2011
Inventory

2,500

5,000

2,500

$5,000 unrealized profit in


Sats December 31, 2012
Inventory

5,000

$7,500 unrealized profit in


2013 on sale of land
upstream 80%

6,000

6,000

$15,000 unrealized profit on


sale of equipment in 2013

- 15,000

15,000

$3,750 depreciation on
unrealized profit on
equipment in 2013 and 2014

3,750

7,500

$4,000 constructive loss on


purchase of Pews bonds
in 2014

4,000

4,000

$1,000 piecemeal recognition of


constructive loss in 2014

1,000

1,000

Pews net income

$287,500

$233,000

3,750

$261,750

$303,750

$1,086,000

Solution P7-3
Income from Sum for 2011:
Share of reported income of Sum ($400,000 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 ($96,000/6 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 - $4,000)
Add: Gain on constructive retirement of Pad bonds
($400,000 - $376,000)
Income from Sum

$ 300,000
48,000
(60,000)
12,000
(40,000)
(76,000)
24,000
$ 208,000

Investment in Sum at December 31, 2011:


Underlying equity in Sum ($2,080,000 75%)
Less: Unrealized profit in Sums ending inventory
Less: Unrealized gain on equipment sold to Pad
($96,000 - $48,000 recognized) 75%
Less: Unrealized gain on sale of land to Sum
Less: Unrealized gain on sale of building to
Sum ($80,000 - $4,000 recognized)
Add: Gain on constructive retirement of Pads bonds
Investment in Sum December 31

$1,560,000
(60,000)
(36,000)
(40,000)
(76,000)
24,000
$1,372,000

Noncontrolling interest share:


Net income of Sum
$400,000
Add: Piecemeal recognition of gain on equipment ($96,000/6 years)
16,000
Sums realized income
416,000
Noncontrolling interest percentage
25%
Noncontrolling interest share
$104,000

Solution P7-3 (continued)


Pad Corporation and Subsidiary
Consolidation Working Paper
for the year ended December 31, 2011
(in thousands)

Pad
Income Statement
Sales
Gain on land
Gain on building
Income from Sum
Gain on bonds
Cost of sales

$ 2,520
40
80
208

$ 2,000

1,400*

1,200*

Depreciation expense

304*

160*

Interest expense
Other expenses
Consolidated NI
Noncontrolling int. 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

60

880

600

400

400
400
320*

880
640*

840

480

108

324
20
120
200
280
720
360

160
320
360
600
560
1,372

_______
$ 3,480
$
200
40
800
1,600
840
$ 3,480

Noncontrolling interest January 1


Noncontrolling interest December 31

Consolidated
Statements
$4,320

g
b
c
e
f

24
200
48
16
4

24
2,412*

444*
80*
424*
984
104*
880

600

240*
k

Retained earnings, Dec. 31 $


Balance Sheet
Cash
Bond interest receivable
Other receivables
Inventories
Land
Buildings net
Equipment net
Investment in Sum stock

Adjustments and
Eliminations

Sum 75%

104

400
880
h
k

c
e
h

40

48
48
32

376
$ 2,400
$
320

1,600
480
$ 2,400

240
80

j
20
a
40
d
60
f
40
f
76
e
48
i 1,500

376

i
k

500
24
3,296

j
20
g
400
i 1,600

e
16
_______
3,296

640*
840

472
240
460
600
1,244
872

______
$3,888
$ 520
20
400
1,600
840

508
$3,888

Solution P7-4
Preliminary Computations:
Acquisition price
Implied fair value of She ($640,000 / 80%)
Shes book value
Excess allocated to plant & equipment with 8 year life

$ 640,000
$ 800,000
(600,000)
$ 200,000

Annual depreciation of excess ($200,000 / 8 years)

25,000

Loss is from the constructive retirement of bonds


Purchase price of bonds
Book value of bonds ($200,000 + $6,000 premium)
Loss on retirement of bonds

$212,000
206,000
$ 6,000

Consolidated sales
Combined sales
Less: Intercompany sales
Consolidated sales

$560,000
100,000
$460,000

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
(100,000)
(40,000)
20,000
$ 220,000

Unrealized profit in beginning inventory


Forced computations ($340,000 + $20,000) - ($100,000 +
$220,000)

40,000

Unrealized profit in ending inventory


Combined inventories ($200,000 + $100,000)
Less: Consolidated inventories
Unrealized profit in ending inventory

$300,000
280,000
$ 20,000

Consolidated accounts receivable


Combined accounts receivable ($240,000 + $120,000)
Less: Intercompany receivables
Consolidated accounts receivable

$360,000
30,000
$330,000

Noncontrolling interest share


Shes reported net income
Less: Depreciation of excess
Add: Unrealized profit in beginning inventory
Less: Unrealized profit in ending inventory
Shers realized income
Noncontrolling interest percentage
Noncontrolling interest share

$ 60,000
(25,000)
40,000
(20,000)
55,000
20%
$ 11,000

Solution P7-4 (continued)


8

Noncontrolling interest December 31, 2013


Beginning noncontrolling interest (($670,000 + $150,000
unamortized excess) 20%)
Less: Unrealized profit in beginning inventory
($40,000 20%)
Less: Noncontrolling interest dividends ($30,000 20%)
Add: Noncontrolling interest share
Noncontrolling interest December 31

$164,000
(8,000)
(6,000)
11,000
$161,000

Alternative computation:
Ending equity of She ($700,000 + $125,000 unamortized
$165,000
excess)( 20%)
(4,000)
Less: Unrealized profit in ending inventory ($20,000 20%)
Noncontrolling interest December 31, 2013
$161,000
9

Investment in She stock at December 31, 2012


Investment in She stock at cost
Add: Changes in retained earnings to December 31, 2012
($270,000 - $200,000) 80%
Less: 80% of Excess of ($200,000/8 years) = $20,000 per
year 2 years
Less: Unrealized profit in beginning inventory
($40,000 80%)
Investment in She stock December 31, 2012
Alternative computation:
Investment in She stock December 31, 2013
Less: Income from She for 2013
Add: Dividends from She ($30,000 80%)
Investment in She stock December 31, 2012

10

Income from She


Share of Shes reported net income
Less: Depreciation on excess ($200,000/8 years)
Add: Unrealized profit in beginning inventory
Less: Unrealized profit in ending inventory
Shes adjusted and realized income
Pets 80% controlling share
Less: Constructive loss on retirement of bonds
($6,000 - $2,000)
Pets income from She

$640,000
56,000
(40,000)
(32,000)
$624,000
$640,000
(40,000)
24,000
$624,000
$ 60,000
(25,000)
40,000
(20,000)
$ 55,000
$ 44,000
(4,000)
$ 40,000

Solution P7-5 [AICPA adapted]


1

Consolidated cash ($50,000 + $15,000)

$ 65,000

Equipment net ($800,000 equipment - $320,000 accumulated


depreciation - $21,000 unrealized profit + $7,000 profit
realized through depreciation of excess)

$466,000

Investment in Saw does not appear in consolidated


statements.

Bonds payable (Saws bonds payable of $200,000 1/2 held


outside the consolidated entity)

$100,000

Common stock (Poes stock)

$100,000

Beginning retained earnings (Poes retained earnings)

$272,000

Dividends paid (Poes dividends)

$ 80,000

Gain on retirement of bonds (Book value of Saws


bonds acquired by Poe $100,000 less acquisition cost
of $91,000. Since bonds were acquired on December 31,
2011, none of the $9,000 gain has been amortized.)

Cost of goods sold ($860,000 combined - $60,000


intercompany sales + $10,000 unrealized profit in
ending inventory)

$810,000

Interest expense (Saw paid interest for the entire year to


outside entities so all of Saws interest is reported)

$ 16,000

Depreciation expense ($45,000 combined - depreciation on


the unrealized gain $7,000)

$ 38,000

10
11

9,000

Solution P7-6
Income from Sal for 2012:
Share of reported income of Sal ($100,000 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 ($24,000/6 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 - $1,000)
Add: Gain on constructive retirement of Par bonds
($100,000 - $94,000)
Income from Sal for 2012

$ 75,000
12,000
(15,000)
3,000
(10,000)
(19,000)
6,000
$ 52,000

Investment in Sal at December 31, 2012:


Underlying equity in Sal ($520,000 75%)
Less: Unrealized profit in Sals ending inventory
Less: Unrealized gain on equipment sold to Par
($24,000 - $12,000 recognized) 75%
Less: Unrealized gain on sale of land to Sal
Less: Unrealized gain on sale of building to
Sal ($20,000 - $1,000 recognized)
Add: Gain on constructive retirement of Pars bonds
Investment in Sal December 31

$390,000
(15,000)
(9,000)
(10,000)
(19,000)
6,000
$343,000

Noncontrolling interest share:


Net income of Sal
Add: Piecemeal recognition of gain on
equipment ($24,000/6 years)
Sals realized income
Noncontrolling interest percentage
Noncontrolling interest share

$100,000
4,000
104,000
25%
$ 26,000

Solution P7-6 (continued)


Par Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 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*

15

Depreciation expense

76*

40*

Interest expense
Operating expense
Consolidated NI
Noncontrolling int. 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

c
e
h

Investment in Par bonds

$1,080

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

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