Advanced Financial Accounting 10th Edition Christensen Cottrell Baker Solutions Chapter 8

Chapter 08 - Intercompany Indebtedness
CHAPTER 8
INTERCOMPANY INDEBTEDNESS
ANSWERS TO QUESTIONS
Q8-1 A gain or loss on bond retirement is reported by the consolidated entity whenever (a) one
of the companies purchases its own bonds from a nonaffiliate at an amount other than book
value, or (b) a company within the consolidated entity purchases the bonds of an affiliate from a
nonaffiliate at an amount other than book value.
Q8-2 A constructive retirement occurs when the bonds of a company included in the
consolidated entity are purchased by another company included within the consolidated entity.
Although the debtor still considers the bonds as outstanding, and the investor views the bonds
as an investment, they are constructively retired for consolidation purposes. If bonds are
actually retired, the debtor purchases its own bonds from a nonaffiliate and they are no longer
outstanding.
Q8-3 When bonds sold to an affiliate at par value are not eliminated, bonds payable and bond
investment are misstated in the balance sheet accounts and interest income and interest
expense are misstated in the income statement accounts. There is also a premium or discount
account to be eliminated when the bonds are not issued at par value. Unless interest is paid at
year-end, there is likely to be some amount of interest receivable and interest payable to be
eliminated as well.
Q8-4 Both the bond investment and interest income reported by the purchaser will be
improperly included. Interest expense, bonds payable, and any premium or discount recorded
on the books of the debtor also will be improperly included. In addition, the constructive gain or
loss on bond retirement will be omitted if no eliminating entries are recorded in connection with
the purchase.
Q8-5 If the focus is placed on the legal entity, only bonds actually reacquired by the debtor will
be treated as retired. This treatment can lead to incorrect reports for the consolidated entity in
two dimensions. If a company were to repurchase bonds from an affiliate, any retirement gain or
loss reported by the debtor is not a gain or loss to the economic entity and must be eliminated in
preparing consolidated statements. Moreover, although a purchase of debt of any of the other
companies in the consolidated entity will not be recognized as a retirement by the debtor, when
emphasis is placed on the economic entity the purchase must serve as a basis for recognition of
a bond retirement for the consolidated entity.
Q8-6 The difference in treatment is due to the effect of the transactions on the consolidated
entity. In the case of land sold to another affiliate, a gain has been recorded that is not a gain
from the viewpoint of the consolidated entity. Thus, it must be eliminated in the consolidation
process. On the other hand, in a bond repurchase the buyer simply records an investment in
bonds and the debtor makes no special entries because of the purchase by an affiliate. Neither
company records the effect of the transaction on the economic entity. Thus, in the consolidation
process an entry must be made to show the gain on bond retirement that has occurred from the
viewpoint of the economic entity.
8-1
Q8-7 When there has been a direct sale to an affiliate, the interest income recorded by the
purchaser should equal the interest expense recorded by the seller and the two items should
have no net effect on reported income. The eliminating entries do not change consolidated net
income in this case, but they will result in a more appropriate statement of the relevant income
and expense categories in the consolidated income statement.
Q8-8 Whenever a loss on bond retirement has been reported in a prior period, the affiliate that
purchased the bonds paid more than the book value of the debt shown by the debtor. As a
result, each period the interest income recorded by the buyer will be less than the interest
expense reported by the debtor. When the two income statement accounts are eliminated in the
consolidation process, the effect will be to increase consolidated net income. Because the full
amount of the loss was recognized for consolidated purposes in the year in which the bonds
were purchased by the affiliate, the effect of the elimination process in each of the periods that
follow should be to increase consolidated income.
Q8-9 The difference between the carrying value of the debt on the debtor's books and the
carrying value of the investment on the purchaser's books indicates the amount of unrecognized
gain or loss at the end of the period. To determine the amount of the gain or loss on retirement
at the start of the period, the difference between interest income recorded by the purchaser on
the bond that has been purchased and interest expense recorded by the debtor during the
period is added to the difference between carrying values at the end of the period.
Q8-10 Interest income and interest expense must be eliminated and a loss on bond retirement
established in the elimination process. Consolidated net income will decrease by the amount of
the loss. Because the loss is attributed to the subsidiary, income assigned to the controlling and
noncontrolling interests will decrease in proportion to their share of common stock held.
Q8-11 A constructive gain will be included in the consolidated income statement in this case
and both consolidated net income and income to the controlling interest will increase by the full
amount of the gain.
Q8-12 A direct placement of subsidiary bonds with the parent should have no effect on
consolidated income or on income assigned to the noncontrolling shareholders.
Q8-13 When subsidiary bonds are purchased from a nonaffiliate by the parent and there is a
constructive gain or loss for consolidated purposes, the gain or loss is assigned to the
subsidiary and included in computing income to the noncontrolling shareholders.
Q8-14 Interest income recorded by the subsidiary and interest expense recorded by the parent
should be equal in the direct placement case. When the subsidiary purchases parent company
bonds from a nonaffiliate, interest income and interest expense will not be the same unless the
bonds are purchased from the nonaffiliate at an amount equal to the liability reported by the
parent.
Q8-15 A gain on constructive bond retirement recorded in a prior period means the bonds were
purchased for less than book value and the interest income recorded by the subsidiary each
period will be greater than the interest expense recorded by the parent. Consolidated net
income for the current period will decrease by the difference between interest income and
interest expense as these amounts are eliminated in preparing the consolidated statements.
Income to the noncontrolling interest will be unaffected since the constructive gain is assigned
to parent company.
8-2
Q8-16 A constructive loss recorded on the subsidiary's bonds in a prior period means the
interest income recorded by the parent is less than the interest expense recorded by the
subsidiary in each of the following periods. Consolidated net income will increase when interest
income and expense are eliminated. Income assigned to the noncontrolling interest will be
based on the reported net income of the subsidiary plus the difference between interest income
and interest expense each period following the retirement. As a result, the amount assigned will
be greater than if the bond had not been constructively retired.
Q8-17 On the date the parent sells the bonds to a nonaffiliate they are issued for the first time
from a consolidated perspective. While the parent will record a gain or loss on sale of the bonds
on its books, none is recognized from a consolidated viewpoint. The difference between the sale
price received by the parent and par value is a premium or discount. Each period there will be a
need to establish the correct amount for the premium or discount account and to adjust interest
expense recorded by the subsidiary to bring the reported amounts into conformity with the sale
price to the nonaffiliate.
Q8-18 The retirement gain or loss reported by the subsidiary when it repurchases the bonds
held by the parent must be eliminated in the consolidation process. From the viewpoint of the
consolidated entity the bonds were retired at the point they were purchased by the parent and a
gain or loss should have been recognized at that point.
8-3
SOLUTIONS TO CASES
C8-1 Recognition of Retirement Gains and Losses
a. When Flood purchases the bonds it establishes an investment account on its books and
Bradley establishes a bond liability and discount account on its books. No entry is made by
Century. When Century purchases the bonds, Century records an investment and Flood
removes the balance in the investment account and records a gain on the sale. Bradley makes
no entry. When Bradley retires the issue, Bradley removes its liability and unamortized discount
and records a loss on bond retirement. Century removes the bond investment account and
records a loss on the sale of bonds. Flood makes no entry.
b. A constructive loss on bond retirement is reported by the consolidated entity at the time
Century purchases the bonds from Flood. The exact amount of the loss cannot be ascertained
without knowing the maturity date of the bonds, the date of initial sale, and the date of purchase
by Century.
c. The initial sale of bonds by Bradley is treated as a normal transaction with no need for an
adjustment to income assigned to the noncontrolling shareholders. Income assigned to
noncontrolling shareholders will be reduced by a proportionate share of the loss reported in the
consolidated income statement in the period in which Century purchases the bonds from Flood.
In the years before the bonds are retired by Bradley, income assigned to the noncontrolling
interest (assuming no differential) will be greater than a pro rata portion of the reported net
income of Bradley. In the period in which the bonds are retired by Bradley, reported net income
of Bradley must be adjusted to remove its loss on bond retirement before assigning income to
the noncontrolling interest. No adjustment is made in the years following the repurchase by
Bradley.
8-4
C8-2 Borrowing by Variable Interest Entities
MEMO
To: President
Hydro Corporation
From: , Accounting Staff
Re: Consolidation of Joint Venture
Hydro Corporation and Rich Corner Bank established a joint venture which borrowed
$30,000,000 and built a new production facility. That facility is now leased to Hydro on a 10-year
operating lease. Hydro currently reports the annual lease payment as an operating expense and
in the notes to its financial statements must report a contingent liability for its guarantee of the
debt of the joint venture. I have been asked to review the current financial reporting standards
and determine whether Hydro’s current reporting is appropriate.
The circumstances surrounding the creation of the joint venture and the lease arrangement with
Hydro appear to point to the need for Hydro to consolidate the joint venture with its own
operations. Although Rich Corner Bank holds 100 percent of the equity of the joint venture, it
has contributed less than 1 percent of the total assets of the joint venture ($200,000 of equity
versus $30,000,000 of total borrowings). Under normal circumstances, less than a 10 percent
investment in the entity’s total assets is considered insufficient to permit the entity to finance its
activities. [FIN 46R, Par 9; ASC 810-10-25-45]
In this situation, Hydro has guaranteed the $30,000,000 borrowed by the joint venture and has
guaranteed a 20 percent annual return on the equity investment of Rich Corner Bank. These
conditions will result in Hydro Corporation absorbing any losses incurred by the joint venture
and establish Hydro Corporation as the primary beneficiary of the entity. The FASB requires
consolidation by the entity that will absorb a majority of the entity’s expected losses if they
occur. [FIN 46R, Par. 14; ASC 810-10-25-38]
Consolidation of the joint venture will result in including the production facility among Hydro’s
assets and the debt as part of its long-term liabilities. The claim on the net assets of the joint
venture held by Rich Corner Bank will be reported as part of noncontrolling interest. Hydro’s
consolidated income statement will not include the lease payment as an operating expense, but
will include depreciation expense on the production facility and interest expense for the interest
payment made on the borrowing of the joint venture.
Primary citation:
FASB INT. 46 (ASC 810)
8-5
Case 8-3 Subsidiary Bond Holdings
MEMO
To: Financial Vice-President
Farflung Corporation
From: , Accounting Staff
Re: Investment in Bonds Issued by Subsidiary
The consolidated financial statements of Farflung Corporation should include both Micro
Company and Eagle Corporation. The purpose of the consolidated statements is to present the
financial position and results of operations for a parent and one or more subsidiaries as if the
individual entities actually were a single company or entity. [ARB 51, Par. 1; ASC 810-10-10-1]
When one subsidiary purchases the bonds of another, the investment reported by the
purchasing affiliate and the liability reported by the debtor must be eliminated and a gain or loss
reported on the difference between the purchase price and the carrying value of the debt at the
time of purchase.
In preparing Farflung’s consolidated statements at December 31, 20X4, the following eliminating
entry should have been included in the worksheet:
Bonds Payable 400,000

Loss on Bond Retirement 24,000
Investment in Micro Company Bonds 424,000
The $24,000 loss should have been included in the consolidated income statement, leading to a
reduction of $15,600 ($24,000 x 0.65) in income assigned to the controlling interest and a
reduction of $8,400 ($24,000 x 0.35) in income assigned to noncontrolling shareholders. This
error should be corrected by restating the financial statements of the consolidated entity for
20X4.
While omission of the eliminating entry resulted in incorrect financial statements for the
consolidated entity, it should have no impact on the financial statements of the individual
subsidiaries. Assuming (1) the bonds had 15 years remaining until maturity when purchased by
Eagle and pay 8 percent interest annually, (2) straight-line amortization of the premium paid by
Eagle is appropriate, and (3) the consolidated financial statements as of December 31, 20X4,
are corrected, the eliminating entry at December 31, 20X5, is:

Interest Income 30,400(a)
Investment in Micro Company 15,600
Noncontrolling Interest 8,400
Investment in Micro Company Bonds 422,400(b)
Interest Expense 32,000(c)
(a) ($400,000 x 0.08) - ($24,000/15 years)

(b) $424,000 - ($24,000/15 years)
(c) $400,000 x 0.08
Primary citation:
ARB 51, Par. 6; ASC 810-10-45-1
8-6
C8-4 Interest Income and Expense
a. Snerd apparently paid more than par value for the bonds and is amortizing the premium
against interest income over the life of the bonds. Thus, the cash received is greater than the
amount of interest income recorded.
b. With the information given, the following appears to be true:
(1) When purchasing the bonds, Snerd apparently paid less than the current carrying
amount of the bonds on the subsidiary’s books because a constructive gain on bond
retirement is included in the 20X3 consolidated income statement. Since Snerd paid par
value for the bonds, they must have been sold at a premium by the subsidiary.
(2) Because the bonds were sold at a premium, interest expense recorded by the
subsidiary will be less than the annual interest payment made to the parent.
(3) Interest income recorded each period by Snerd will exceed interest expense recorded
by the subsidiary. When the two balances are eliminated, the effect will be to reduce
income to both the controlling and noncontrolling shareholders.
C8-5 Intercompany Debt
Answers to this case can be found in the SEC Form 10-K filed by Hershey Foods and its annual
report.
a. When intercompany loans are made between affiliates in different countries, the problem of
changing currency exchange rates may arise, especially if any of the loans are denominated in
a currency that rapidly changes in value against the dollar. Hershey Foods and many other
companies in the same situation hedge their intercompany receivables/payables through foreign
currency forward contracts and swaps.
b. Hershey's intercompany receivables/payables appear to come primarily from intercompany

purchases and sales of goods.
8-7
SOLUTIONS TO EXERCISES
E8-1 Bond Sale from Parent to Subsidiary
a. 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

Investment in Lamar Corporation Bonds 300
b. Journal entries recorded by Lamar Corporation:
January 1, 20X2
Cash 156,000
Bond Premium 6,000
July 1, 20X2
Interest Expense 4,200
Bond Premium 300
Cash 4,500
December 31, 20X2

Bond Premium 300
Interest Payable 4,500
c. Eliminating entries, December 31, 20X2:
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.
Interest payable 4,500

Interest receivable 4,500
Eliminate intercompany receivable/payable.
8-8
E8-2 Computation of Transfer Price
a. $105,000 = $100,000 par value + ($250 x 20 periods) premium
b. $103,500 = $105,000 - ($250 x 6 periods)
c. Eliminating entries:

Bond Premium 3,500
Investment in Nettle Corporation Bonds 103,500

E8-3 Bond Sale at Discount
a. $16,800 = [($600,000 x 0.08) + ($12,000 / 5 years)] x 1/3
b. Journal entries recorded by Wood Corporation:
January 1, 20X4
Cash 16,000
July 1, 20X4
Cash 16,000
Investment in Carter Company Bonds 800
$800 = ($400,000 - $392,000)/(5 x 2)
December 31, 20X4

Investment in Carter Company Bonds 800

Investment in Carter Company Bonds 395,200
Bond Discount 4,800
$33,600 = $16,000 + $16,000 + $800 + $800
$395,200 = $392,000 + ($800 x 4)
$4,800 = $8,000 - ($800 x 4)

8-9
E8-4 Evaluation of Intercorporate Bond Holdings
a. The bonds were originally sold at a discount. Stellar purchased the bonds at par value and
a constructive loss was reported.
b. The annual interest payment received by Stellar will be less than the interest expense
recorded by the subsidiary. When bonds are sold at a discount, the issue price of the
bonds is adjusted downward because the annual interest payment is less than is needed to
issue the bonds at par value.
c. In 20X6, consolidated net income was decreased as a result of the loss on constructive
retirement of bonds. Each period following the purchase, the amount of interest expense
recorded by the subsidiary will exceed the interest income recorded by the parent. When
these two amounts are eliminated, consolidated net income will be increased. Thus,
consolidated net income for 20X7 will be increased.
E8-5 Multiple-Choice Questions
1. a A constructive gain of $100,000 is included in consolidated net income for the period
ended March 31, 20X8, and consolidated retained earnings at March 31, 20X8.
Because the bonds of the parent are constructively retired, there is no effect on the
amounts assigned to the noncontrolling interest. [AICPA Adapted]
2. a The loss on bond retirement will result in a reduction in consolidated retained earnings.
[AICPA Adapted]
3. b $4,700 = ($50,000 x 0.10) - ($3,000 / 10 years)
4. a $4,000 = ($50,000 x 0.10) - ($8,000 / 8 years)
5. c $5,600 loss = $58,000 purchase price

- [$53,000 - ($3,000 / 10 years) x 2 years]
6. c Operating income of Kruse Corporation $40,000

Net income of Gary's Ice Cream Parlors 20,000
$60,000
Less: Loss on bond retirement (5,600)
Recognition during 20X6
($4,700 - $4,000) 700
Consolidated net income $55,100
8-10
E8-6 Multiple-Choice Questions
1. a $14,000 = [($300,000 x 0.09) - ($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 $ 8,100
E8-7 Constructive Retirement at End of Year
a. Eliminating entries, December 31, 20X5:

Investment in Able Company Bonds 397,000
Gain on Bond Retirement 12,000
$9,000 = [($400,000 x 1.03) - $400,000] x 15/20
$12,000 = $9,000 + $400,000 - $397,000

b. Eliminating entries, December 31, 20X6:

Investment in Able Co. 7,200
NCI in NA of Able Co. 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 0.60
$4,800 = $12,000 x 0.40

8-11
8-12
E8-8 Constructive Retirement at Beginning of Year

$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)


Investment in Able Co. 7,200
NCI in NA of Able Co. 4,800

8-13
E8-9 Retirement of Bonds Sold at a Discount
Elimination of bond investment at December 31, 20X8:

Loss on Constructive Bond Retirement 2,730
Investment in Farley Corporation Bonds 297,120
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 0.97) $291,000

Amortization of discount
[($300,000 - $291,0000) / 20 years] x 7 years 3,150
Book value of liability at January 1, 20X8 $294,150
E8-10 Loss on Constructive Retirement
Eliminating entries, December 31, 20X8:

Investment in Apple Corporation Bonds 106,000

8-14
E8-11 Determining the Amount of Retirement Gain or Loss
a. Par value of bonds outstanding $200,000

Annual interest rate x .12
Interest payment $ 24,000
Amortization of bond premium
($15,000 x 2 bonds) / 5 years (6,000)
Interest charge for full year $ 18,000
Less: Interest on bond purchased by Online Enterprises
[($18,000 x 1/2) x (4 months / 12 months)] (3,000)
Interest expense included in consolidated
income statement $ 15,000
b. Sale price of bonds, January 1, 20X1 $115,000

Amortization of premium [($15,000 / 5) x 2 2/3 years] (8,000)
Book value at time of purchase $107,000
Purchase price (100,000)
Gain on bond retirement $ 7,000

Bond Premium 6,000
Investment in Downlink Bonds 100,000

8-15
E8-12 Evaluation of Bond Retirement
a. No gain or loss will be reported by Bundle.
b. A gain of $13,000 will be reported:
Book value of liability reported by Bundle:

Par value of bonds outstanding $200,000
Unamortized premium
$8,000 - [($8,000 / 10 years) x 3.5 years] 5,200
Book value of debt $205,200
Amount paid by Parent (192,200)
c. Consolidated net income for 20X6 will increase by $12,000:

Adjustment for excess of interest income
over interest expense:
Interest income $(11,600)
Interest expense 10,600 (1,000)
Increase in consolidated net income $ 12,000
d. Eliminating entries, December 31, 20X6:

Investment in Bundle Company Bonds 192,800
$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

8-16
E8-12 (continued)
e. Eliminating entries, December 31, 20X7:

Investment in Bundle Company Bonds 194,000
Investment in Bundle Co. 8,400
NCI in NA of Bundle Co. 3,600
$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 0.70
$3,600 = ($13,000 - $1,000) x 0.30

f. Income assigned to noncontrolling interest in 20X7 is $14,400:
Net income reported by Bundle $ 50,000

Interest expense 21,200 (2,000)
Realized net income $ 48,000
Proportion of ownership held x .30
Income assigned to noncontrolling interest $ 14,400
8-17
E8-13 Elimination of Intercorporate Bond Holdings

Constructive Loss on Bond Retirement 1,400
Investment in Stang Corporation Bonds 104,200
$3,000 = $5,000 - ($500 x 4 years)
$11,300 = $12,000 - ($4,900 / 7 years)
$1,400 = $104,900 - ($105,000 - $1,500)
$104,200 = $104,900 - ($4,900 / 7 years)
$11,500 = $12,000 - ($5,000 / 10 years)

b. Income assigned to noncontrolling interest in 20X8 is $6,580:
Net income reported by Stang Corporation $ 20,000

Constructive loss on bond retirement (1,400)
Adjustment for excess of interest expense
over interest income:
Interest expense $11,500
Interest income (11,300) 200
Realized net income $ 18,800
Proportion of ownership held x 0.35

Investment in Stang Corp. 780
NCI in NA of Stang Corp. 420
Investment in Stang Corporation Bonds 103,500
$2,500 = $3,000 - $500
$11,300 = $12,000 - ($4,900 / 7 years)
$780 = ($1,400 - $200) x 0.65
$420 = ($1,400 - $200) x 0.35
$103,500 = $104,200 - $700
$11,500 = $12,000 - ($5,000 / 10 years)

8-18
SOLUTIONS TO PROBLEMS
P8-14 Consolidation Worksheet with Sale of Bonds to Subsidiary
a. Entries recorded by Porter on its investment in Temple:
Cash 6,000
Investment in Temple Corporation 6,000
Record dividends from Temple: $10,000 x 0.60
Investment in Temple Corporation 18,000

Income from Subsidiary 18,000
Record equity-method income: $30,000 x 0.60
b. Entry recorded by Porter on its bonds payable:

Bond Premium 400
Cash 6,400
Record interest payment: $400 = ($82,000 - $80,000) / 5 years
c. Entry recorded by Temple on bond investment:
Cash 6,400
Investment in Porter Company Bonds 400
8-19
P8-14 (continued)
d.
Book Value Calculations:

NCI + Porter Co. = Common + Retained
40% 60% Stock Earnings
Original book value 60,000 90,000 100,000 50,000
+ Net Income 12,000 18,000 30,000
- Dividends (4,000) (6,000) (10,000)
Ending book value 68,000 102,000 100,000 70,000
Basic elimination entry

Common stock 100,000
Retained earnings 50,000
Income from Temple Co. 18,000
NCI in NI of Temple Co. 12,000
Dividends declared 10,000
Investment in Temple Co. 102,000
NCI in NA of Temple Co. 68,000
Eliminate intercorporate bond holdings

Bond Premium 1,200
Investment in Temple Co.'s Bonds 81,200
8-20
P8-14 (continued)
e.
Porter Temple Elimination Entries
Co. Co. DR CR Consolidated
Income Statement
Sales 200,000 114,000 314,000
Interest Income 6,000 6,000
Less: COGS (99,800) (61,000) (160,800)
Less: Depreciation Expense (25,000) (15,000) (40,000)
Less: Interest Expenses (6,000) (14,000) 6,000 (14,000)
Income from Temple Co. 18,000 18,000 0
Consolidated Net Income 87,200 30,000 24,000 6,000 99,200
NCI in Net Income 12,000 (12,000)
Controlling Interest in Net Income 87,200 30,000 36,000 6,000 87,200
Statement of Retained Earnings

Beginning Balance 230,000 50,000 50,000 230,000
Net Income 87,200 30,000 36,000 6,000 87,200
Less: Dividends Declared (40,000) (10,000) 10,000 (40,000)
Ending Balance 277,200 70,000 86,000 16,000 277,200
Balance Sheet
Cash and Accounts Receivable 80,200 40,000 120,200
Inventory 120,000 65,000 185,000
Buildings & Equipment 500,000 300,000 800,000
Less: Accumulated Depreciation (175,000) (75,000) (250,000)
Investment in Porter Co.Bonds 81,200 81,200
Investment in Temple Co. 102,000 102,000 0
Total Assets 627,200 411,200 0 183,200 855,200
Accounts Payable 68,800 41,200 110,000

Bonds Payable 80,000 200,000 80,000 200,000
Bond Premium 1,200 1,200
Common Stock 200,000 100,000 100,000 200,000
Retained Earnings 277,200 70,000 86,000 16,000 277,200
NCI in NA of Temple Co. 68,000 68,000
Total Liabilities & Equity 627,200 411,200 267,200 84,000 855,200
8-21
P8-15 Consolidation Worksheet with Sale of Bonds to Parent
a. Entries recorded by Mega Corporation on its investment in Tarp Company:
Cash 18,000
Investment in Tarp Company Stock 18,000
Record dividends from Temple: $20,000 x 0.90
Investment in Tarp Company Stock 22,500

Record equity-method income: $25,000 x 0.90
b. Entry recorded by Mega Corporation on its investment in Tarp Company bonds:
Cash 6,000
Investment in Tarp Company Bonds 800
Record interest payment: $800 = ($104,000 - $100,000) / 5 years
c. Entry recorded by Tarp Company on its bonds payable:

Bond Premium 800
Cash 6,000
d.
Mega
NCI + Corp. = Common + Retained
+ Net Income 2,500 22,500 25,000
- Dividends (2,000) (18,000) (20,000)

Common stock 80,000
Income from Tarp Co. 22,500
NCI in NI of Tarp Co. 2,500
Investment in Tarp Co. 121,500
NCI in NA of Tarp Co. 13,500

Bond Premium 1,600
Investment in Tarp Co.'s Bonds 101,600
8-22
P8-15 (continued)
e.
Mega Tarp Elimination Entries
Corp. Co. DR CR Consolidated
Income Statement
Sales 140,000 125,000 265,000
Interest Income 5,200 5,200
Less: COGS (86,000) (79,800) (165,800)
Less: Interest Expenses (16,000) (5,200) 5,200 (16,000)
Income from Tarp Co. 22,500 22,500 0

Net Income 45,700 25,000 30,200 5,200 45,700
Ending Balance 257,700 55,000 80,200 25,200 257,700
Balance Sheet
Cash and Accounts Receivable 22,000 36,600 58,600
Inventory 165,000 75,000 240,000
Investment in Tarp Co.Bonds 101,600 101,600
Investment in Tarp Co. 121,500 121,500 0
Total Assets 670,100 271,600 0 223,100 718,600
Current Payables 92,400 35,000 127,400

Bonds Payable 200,000 100,000 100,000 200,000
Common Stock 120,000 80,000 80,000 120,000
NCI in NA of Tarp Co. 13,500 13,500
8-23
P8-16 Direct Sale of Bonds to Parent
a. Journal entries recorded by Fern Corporation:
January 1, 20X3
Cash 2,000
Receive interest on bond investment.
July 1, 20X3
Cash 2,000
Investment in Vincent Company Bonds 250
Record receipt of bond interest: $250 = $5,000 /
(10 years x 2)
December 31, 20X3

Cash 7,000
Investment in Vincent Company Stock 7,000
Record dividends for Vincent: $7,000 = $10,000 x 0.70
Interest Receivable (Current Receivables) 2,000

Investment in Vincent Company Bonds 250
Accrue interest income at year-end.

Record equity-method income: $21,000 = $30,000 x 0.70
Income from Vincent Co. 2,800

Record amortization of differential: $2,800 = ($56,000 / 14 years) x 0.70
b. Journal entries recorded by Vincent Company:
January 1, 20X3
Cash 4,000
Record interest payment: $4,000 = $100,000 x (.08 / 2)
July 1, 20X3
Discount on Bonds Payable 500
Cash 4,000
Semiannual payment of interest: $500 = $10,000 / 20 semiannual
payments
December 31, 20X3

Interest Payable (Current Liabilities) 4,000
Accrue interest expense at year-end.
8-24
P8-16 (continued)
c.
NCI Fern Corp. Common Retained
+ = +
+ Net Income 9,000 21,000 30,000
- Dividends (3,000) (7,000) (10,000)

Common stock 50,000
NCI in NI of Vincent Co. 9,000
Investment in Vincent Co. 119,000
NCI in NA of Vincent Co. 51,000
Excess Value (Differential) Calculations:

NCI Fern Corp. Buildings and
30% + 70% = Equipment + Acc. Depr.
Beg. balance 14,400 33,600 56,000 (8,000)
Changes (1,200) (2,800) (4,000)
Ending balance 13,200 30,800 56,000 (12,000)
Amortized excess value reclassification entry:

Depreciation expense 4,000
NCI in NI of Vincent Co. 1,200
Excess value (differential) reclassification entry:

Buildings and Equipment 56,000
Accumulated Depreciation 12,000
Remove gain on land:

Land 8,000

Investment in Vincent Bonds 46,500
Discount on BP 3,500

8-25
P8-16 (continued)
d.
Fern Vincent Elimination Entries
Income Statement
Sales 300,000 200,000 500,000
Interest income 4,500 4,500 0
Less: Other Expenses (198,500) (161,000) 4,000 (363,500)
Less: Interest Expense (27,000) (9,000) 4,500 (31,500)
Income from Vincent Co. 18,200 21,000 2,800 0
NCI in Net Income 9,000 1,200 (7,800)
Controlling Interest in Net
Income 97,200 30,000 38,500 8,500 97,200

Net Income 97,200 30,000 38,500 8,500 97,200
Ending Balance 276,000 120,000 138,500 18,500 276,000
Balance Sheet
Cash & Current Receivables 30,300 46,000 2,000 74,300
Inventory 170,000 70,000 240,000
Land, Buildings, & Equipment (net) 320,000 180,000 56,000 12,000 536,000
8,000
Investment in Vincent Co. Stock 144,200 5,600 119,000 0
30,800
Investment in Vincent Co. Bonds 46,500 46,500 0
Total Assets 711,000 296,000 61,600 218,300 850,300
Current Liabilities 35,000 33,000 2,000 66,000

Bonds Payable 300,000 100,000 50,000 350,000
Discount on Bonds Payable (7,000) 3,500 (3,500)
Common Stock 100,000 50,000 50,000 100,000
NCI in NA of Vincent Co. 2,400 51,000 61,800
13,200
8-26
P8-17 Information Provided in Eliminating Entry
a. Rupp Corporation is the parent company. In the eliminating entry, noncontrolling

interest is credited with a portion of the constructive gain on bond retirement.
b. Rupp holds 75 percent ownership of Gross [$4,200 / ($4,200 + $1,400)].
c. Amount paid to acquire bonds:
Investment in Gross bonds, December 31, 20X7 $198,200
Amortization of discount following purchase
[($200,000 - $198,200) / 3 years] x 2.5 years (1,500)
Purchase price paid by Rupp $196,700
d. A gain of $7,700 was reported:
Book value of liability reported by Gross:
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)
e. Consolidated net income for 20X7 after adjustment for bond retirement:
Amount reported without adjustment $ 70,000
Income expense 17,200
(1,400)
Consolidated net income $ 68,600
f. Income assigned to the noncontrolling interest will decrease by $350

($1,400 x 0.25) as a result of the eliminating entry.
g. Eliminating entry prepared at December 31, 20X8:
Investment in Gross Corporation Bonds 198,800
Investment in Gross Corp. 3,150
NCI in NA of Gross Corp. 1,050
Eliminate intercompany bond holdings:
$1,600 = ($2,400 / 3 years) x 2 years
$18,600 = ($200,000 x 0.09) + ($1,800 / 3 years)
$198,800 = $198,200 + ($1,800 / 3 years)
$17,200 = ($200,000 x 0.09) - ($2,400 / 3 years)
$3,150 = [$7,700 - ($1,400 x 2.5 years)] x 0.75
$1,050 = [$7,700 - ($1,400 x 2.5 years)] x 0.25
8-27
P8-18 Prior Retirement of Bonds
a. Amount paid by Amazing Corporation for bonds:
Reported balance, December 31, 20X6 $102,400

Amortization of premium during 20X6
($2,400 / 6 years) 400
Purchase price $102,800
b. Interest Expense 9,500

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
Annual receipt of interest: $8,600 = [$9,000 - ($2,400 / 6 years)]
d. Bonds Payable 100,000

Investment in Broadway Company Bonds 102,800
$6,300 = $102,800 - [$97,000 -($3,000 / 6 years)]
$102,800 = computed above
$3,500 = [$3,000 + ($3,000 / 6 years)]
e. Consolidated net Income and income to controlling interest for 20X5 and 20X6:
20X5 20X6
Operating income reported by Amazing $120,000 $150,000
Net income reported by Broadway 60,000 80,000
Loss on bond retirement (6,300)
($9,500) over interest income ($8,600) 900
Consolidated net income $173,700 $230,900
Income to noncontrolling interest:
($60,000 - $6,300) x 0.15 (8,055)
($80,000 + $900) x 0.15 (12,135)
Income to controlling interest $165,645 $218,765
8-28
P8-19 Incomplete Data
a. Purchase price of bonds:
Balance reported in bond investment account in

excess of par value, December 31, 20X4
($109,000 - $100,000) $ 9,000
Amount amortized per year ($9,000 / 6 years) 1,500
Premium at date of purchase $ 10,500
Par value 100,000
Purchase price $110,500
b. 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 $107,000
c. Income to noncontrolling interest in 20X5:
Reported net income of Condor Company $ 30,000

over interest income recorded in 20X5 500
$ 30,500
Proportion of stock held by noncontrolling interest x 0.30
Excess of interest expense over interest income

Interest expense: ($100,000 x 0.12) - ($10,000 / 10) $11,000
Interest income: ($100,000 x 0.12) – ($10,500 / 7) (10,500)
Excess $ 500
8-29
P8-20 Balance Sheet Eliminations
a.
Bath
+ Net Income 15,000 60,000 75,000
- Dividends (2,000) (8,000) (10,000)
Reversal/Deferred GP Calculations:
Bath
Corp.'s
Total = share + NCI's share
Downstream Deferred GP (12,000) (12,000)
Upstream Deferred GP (6,000) (4,800) (1,200)
Total (18,000) (16,800) (1,200)

Common stock 100,000 ← Original amount invested (100%)
Retained earnings 105,000 ← Beginning balance in retained earnings
Income from Stang Co. 43,200 ← Bath’s % of NI - Deferred GP + Reversal
NCI in NI of Stang Co. 13,800 ← NCI share of NI - Deferred GP + Reversal
Dividends declared 10,000 ← 100% of Stang Co.'s dividends declared
Investment in Stang Co. 199,200 ← Net book value - Deferred GP + Reversal
NCI in NA of Stang Co. 52,800 ← NCI share of BV - Deferred GP + Reversal
8-30
P8-20 (continued)
20X4 Downstream Transactions

Ending
Total = Re-sold + Inventory
Sales 100,000 58,000 42,000
COGS 71,429 41,429 30,000
Gross Profit 28,571 16,571 12,000
Gross Profit % 28.57%
20X4 Upstream Transactions

Ending
Sales 50,000 24,000 26,000
COGS 38,462 18,462 20,000
Gross Profit 11,538 5,538 6,000
Deferral of this year's unrealized profits on inventory transfers

Sales 150,000
Cost of Goods Sold 132,000
Inventory 18,000
Bond and other Debt Elimination Entries:

Bond Premium 12,000
Investment in Stang Bonds 101,500
Investment in Stang Stock 8,400
NCI in NA of Stang 2,100

8-31
P8-20 (continued)
b.
Bath Stang Elimination Entries
Balance Sheet
Cash and Receivables 122,500 124,000 4,000 242,500
Inventory 200,000 150,000 18,000 332,000
Buildings & Equipment (net) 320,000 360,000 680,000
Investment in Stang Co.
Bonds 101,500 101,500 0
Investment in Stang Co.
Stock 207,600 199,200 0
8,400
Total Assets 951,600 634,000 0 331,100 1,254,500
Accounts Payable 40,000 28,000 4,000 64,000

Bonds Payable 400,000 300,000 100,000 600,000
Premium on Bonds Payable 36,000 12,000 24,000
Common Stock 200,000 100,000 100,000 200,000
Retained Earnings 311,600 170,000 105,000 311,600
43,200
13,800 10,000
150,000 132,000
NCI in NA of Stang Co. 52,800 54,900
2,100
Total Liabilities & Equity 951,600 634,000 528,000 196,900 1,254,500
c. 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
Stockholders’ Equity:
Controlling Interest:
Common Stock $200,000
Retained Earnings 311,600
Total Controlling interest $511,600
Total Stockholders’ Equity 566,500
Total Liabilities and Stockholders’ Equity $1,254,500
8-32
P8-21 Computations Relating to Bond Purchase from Nonaffiliate
Note: We accidentally changed the “Investment in Bliss Perfume Company Bonds”

instead of “Investment in Bliss Perfume Company Stock” when we converted the
problem from the modified to the fully adjusted equity method. The following answer is
based on the following corrected Investment in Bliss Perfume Company Bonds: $105,600
a. Balance reported, December 31, 20X4 $105,600

Amortization of premium during 20X4:
Annual amortization ($5,600 / 7 years) $800
Portion of year held x 0.75
Amortized in 20X4 600
Purchase price of bonds $106,200
b. Carrying value of liability at date of acquisition:

Carrying value at year-end $107,000
Premium amortized between date of purchase
and December 31, 20X4 ($1,000 x 0.75) 750
Carrying value at acquisition $107,750
Gain on constructive retirement $ 1,550

Bond Premium 7,000
Investment in Bliss Company Bonds 105,600
Elimination of interest income:

Interest income at nominal rate
($100,000 x 0.10) $10,000
Annual amortization of premium by Parsons (800)
Annual interest income recorded by Parsons $ 9,200
Portion of year held by Parsons x 0.75
Interest income for 20X4 $ 6,900
Elimination of interest expense:

Interest expense at nominal rate
($100,000 x 0.10) $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 0.75
Interest expense eliminated $ 6,750

8-33
P8-22 Computations following Parent's Acquisition of Subsidiary Bonds
a. Book value of bonds purchased by Mainstream Corporation:
Balance reported, December 31, 20X5 $111,250

Amortization of premium in 20X4 and 20X5
($11,250 / 3 years) x 2 years 7,500
Balance at date of purchase $118,750
Proportion of bonds purchased by Mainstream x 0.40
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
b. Income from Offenberg 560

Investment in Offenberg 560
Recognize 80% share of 1/5 of the constructive gain
c. Bonds Payable 40,000

Bond Premium 4,500
Investment in Offenberg Company Bonds 42,400
Investment in Offenberg 2,240
NCI in NA of Offenberg 560
$4,500 = $11,250 x 0.40
$3,200 = ($40,000 x 0.10) - $800
$2,500 = ($40,000 x 0.10) - ($3,750 x 0.40)
$2,240 = ($3,500 - $700) x 0.80
$560 = ($3,500 - $700) x 0.20
d. Consolidated retained earnings $501,680
8-34
P8-23 Consolidation Worksheet — Year of Retirement

a.
Tyler Retained
NCI + Manufacturing = Common +
Original book
value 60,000 90,000 100,000 50,000
+ Net Income 12,000 18,000 30,000
- Dividends (4,000) (6,000) (10,000)
Ending book
value 68,000 102,000 100,000 70,000
Total = Tyler’s share + NCI's share
Constructive Gain 7,000 4,200 2,800
Extra Depreciation 400 240 160
Total 7,400 4,440 2,960

Income from Brown Corp. 22,440 ← Tyler’s % of NI + Retirement Gain + Excess Depr.
NCI in NI of Brown Corp. 14,960 ← NCI share of NI + Retirement Gain + Excess Depr.
Dividends declared 10,000 ← 100% of Brown Corp.'s dividends declared
Investment in Brown Corp. 106,440 ← Net book value + Retirement Gain + Excess Depr.
NCI in NA of Brown Corp. 70,960 ← NCI share of BV + Retirement Gain + Excess Depr.
Accumulated
Equipment Depreciation
Lofton Co. 30,000 Actual 4,000
10,000 400 15,600
Temple Corp. 40,000 "As If" 19,200
Eliminate the gain on Equipment and correct asset's basis:

Investment in Temple Corp. 3,360
NCI in NA of Temple Corp. 2,240
Equipment 10,000
Accumulated Depreciation 400

Depreciation Expense 400
Bond Elimination Entry:

Bond Premium 7,000
Investment in Brown Bonds 50,000
8-35
P8-23 (continued)
Brown Elimination Entries

Tyler Corp. DR CR Consolidated
Income Statement
Sales 400,000 200,000 600,000
Gain on Bond
Retirement 7,000 7,000
Less: Interest Expense (20,000) (20,000) (40,000)
Less: Operating
Expenses (302,200) (150,000) 400 (451,800)
Income from Brown
Corp. 22,440 22,440 0
Consolidated Net
Income 100,240 30,000 22,440 7,400 115,200
Controlling Interest in
Net Income 100,240 30,000 37,400 7,400 100,240

Net Income 100,240 30,000 37,400 7,400 100,240
Less: Dividends
Declared (40,000) (10,000) 10,000 (40,000)
Ending Balance 206,880 70,000 87,400 17,400 206,880
Balance Sheet
Cash 68,000 55,000 123,000
Accounts Receivable 100,000 75,000 175,000
Inventory 120,000 110,000 230,000
Depreciable Assets
(net) 360,000 210,000 400 15,600 564,800
10,000
Investment in Brown
Corp. Bonds 50,000 50,000 0
Investment in Brown
Corp. Stock 103,080 3,360 106,440 0
Total Assets 801,080 450,000 13,760 172,040 1,092,800

Bonds Payable 200,000 200,000 50,000 350,000
Bond Premium 28,000 7,000 21,000
Common Stock 300,000 100,000 100,000 300,000
NCI in NA of Brown Co. 2,240 70,960 68,720
Total Liab. & Equity 801,080 450,000 246,640 88,360 1,092,800
8-36
P8-23 (continued)
b. Tyler Manufacturing and Subsidiary

December 31, 20X3
Cash $ 123,000
Accounts Receivable 175,000
Inventory 230,000
Total Current Assets $ 528,000
Depreciable Assets (net) 564,800
Total Assets $1,092,800

Bonds Payable $350,000
Total Controlling Interest $506,880
Total Liabilities and Stockholders' Equity $1,092,800
Tyler Manufacturing and Subsidiary

Consolidated Income Statement
Year Ended December 31, 20X3
Sales $600,000
Total Revenue $607,000
Interest Expense $ 40,000
Operating Expenses 451,800
Total Expenses (491,800)
Consolidated Net Income $115,200
Income to Noncontrolling Interest (14,960)
Income to Controlling Interest $100,240
Tyler Manufacturing and Subsidiary

Consolidated Statement of Retained Earnings
Retained Earnings, January 1, 20X3 $146,640

Income to Controlling Interest, 20X3 100,240
$246,880
Dividends Declared, 20X3 (40,000)
Retained Earnings, December 31, 20X3 $206,880
8-37
P8-24 Consolidation Worksheet — Year after Retirement
a.
Bennett
+ Net Income 20,000 30,000 50,000
- Dividends (4,000) (6,000) (10,000)

Income from Stone Cont. Co. 30,600 ← Bennett’s % of NI + Amort. of loss
NCI in NI of Stone Cont. Co. 20,400 ← NCI share of NI + Amort. of loss
Dividends declared 10,000 ← 100% of Stone Cont. Co.'s dividends
Investment in Stone Cont. Co. 126,600 ← Net book value + Amort. of loss
NCI in NA of Stone Cont. Co. 84,400 ← NCI share of BV + Amort. of loss
Income to Noncontrolling Interest:
Reported net income of Stone $50,000

Amortization of loss on bond retirement:
Carrying value of bond investment $106,000
Par value of debt 100,000)
Unamortized premium paid by
Bennett $ 6,000
Number of years until maturity ÷ 6*
Amortization of premium annually 1,000
Realized net income of Stone Container
$51,000
noncontrolling interest x 0.40
Income to Noncontrolling Interest $20,400
* Stone’s reported interest expense for $100,000 bonds $9,000

Bennett’s reported interest income 8,000
Difference (amortization of premium) $1,000
Total premium 6,000

Yearly amortization ÷ 1,000
Years: 6 years
8-38
P8-24 (continued)

Investment in Stone Cont. Stock. 4,200
NCI in NA of Stone Cont. Co. 2,800
Investment in Stone Cont. Bonds 106,000
Stone Elimination Entries

Bennett Cont.
Income Statement
Sales 450,000 250,000 700,000
Interest Income 8,000 8,000 0
Less: Other Expenses (368,600) (182,000) (550,600)
Income from Stone Cont. Co. 30,600 30,600 0

Net Income 100,000 50,000 59,000 9,000 100,000
Ending Balance 270,000 110,000 129,000 19,000 270,000
Balance Sheet
Cash 61,600 20,000 81,600
Inventory 120,000 110,000 230,000
Other Assets 340,000 250,000 590,000
Investment in Stone Cont. Co. Bonds 106,000 106,000 0
Investment in Stone Cont. Co. Stock 122,400 4,200 126,600 0
Total Assets 850,000 460,000 4,200 232,600 1,081,600

Bonds Payable 200,000 200,000 100,000 300,000
Common Stock 300,000 100,000 100,000 300,000
NCI in NA of Stone Cont. Co. 2,800 84,400 81,600
8-39
P8-24 (continued)
b. Bennett Corporation and Subsidiary

December 31, 20X4
Cash $ 81,600
Accounts Receivable 180,000
Inventory 230,000
Total Current Assets $ 491,600
Other Assets 590,000
Total Asset $1,081,600

Total Controlling Interest $570,000
Total Liabilities and Stockholders’ Equity $1,081,600
Bennett Corporation and Subsidiary

Consolidated Income Statement
December 31, 20X4
Sales $700,000
Interest Expense $ 29,000
Other Expenses 550,600
Total Expenses (579,600)
Consolidated Net Income $120,400
Income to Noncontrolling Interest (20,400)
Income to Controlling Interest $100,000
Bennett Corporation and Subsidiary

Consolidated Statement of Retained Earnings
Retained Earnings, January 1, 20X4 $210,000

Income to Controlling Interest, 20X4 100,000
$310,000
Dividends Declared, 20X4 (40,000)
Retained Earnings, December 31, 20X4 $270,000
8-40
P8-25 Intercorporate Inventory and Debt Transfers
a. Consolidated cost of goods sold for 20X7:

Amount reported by Lance Corporation $620,000
Amount reported by Avery Company 240,000
Adjustment for unrealized profit in
beginning inventory sold in 20X7 (15,000)
Adjustment for inventory purchased from
subsidiary and resold during 20X7:
CGS recorded by Lance $40,000
CGS recorded by Avery ($60,000 - $27,000) 33,000
Total recorded $73,000
CGS based on Lance's cost
[$40,000 x ($33,000 / $60,000)] (22,000)
Required adjustment (51,000)
Cost of goods sold $794,000
b. Consolidated inventory balance:
Amount reported by Lance $167,000

Amount reported by Avery 120,000
Total inventory reported $287,000
Unrealized profit in ending inventory held by
Avery [$20,000 x ($27,000 / $60,000)] (9,000)
Consolidated balance $278,000
c. Entry to record interest expense for Avery Company:

Bond Premium 800
Cash 16,000
Computation of interest expense

Par value of bonds issued $200,000
Stated interest rate x 0.08
Annual interest payment $ 16,000
Annual amortization of premium ($4,800 / 6 years) (800)
Interest expense for 20X7 $ 15,200
8-41
P8-25 (continued)
d. Entry to record interest income for Lance Corporation:
Cash 6,400
Investment in Avery Company Bonds 200
Computation of interest income

Annual payment received ($80,000 x 0.08) $6,400
Amortization of discount
[($80,000 - $78,400) / 8 years] 200
Interest income for 20X7 $6,600
e. Amount assigned to the noncontrolling interest

Avery’s Common Stock $50,000
Avery’s Beginning RE 170,000
Avery’s Net Income 48,000
Avery’s Dividends (24,000)
Constructive Gain 4,160
2 Years Amortization of Constructive Gain (1,040)
Total $247,120
Proportion of ownership held by noncontrolling interest x 0.25
$61,780
Income assigned to noncontrolling interest:
Net income reported by Avery Company $48,000
Adjustment for realization of profit on inventory
sold to Lance in 20X6 15,000
Adjustment for realization of constructive gain on
bond retirement ($4,160 / 8 years) (520)
Realized net income of Avery for 20X7 $62,480
Proportion of ownership held by noncontrolling
Interest x 0.25
Income assigned to noncontrolling interest $15,620
Computation of constructive gain on bond retirement

Bond premium, December 31, 20X7 $4,800
Remaining years’ to maturity ÷ 6
Amortization per year $ 800
Years’ to maturity at purchase x 8
Premium, December 31, 20X5 6,400
Book value of bonds $206,400
Proportion purchased x 0.40
Book value of bonds purchased $ 82,560
Constructive gain $ 4,160
8-42
P8-25 (continued)
f.
Lance
+ Net Income 12,000 36,000 48,000
- Dividends (6,000) (18,000) (24,000)
Lance Corp.'s
Upstream Reversal 15,000 11,250 3,750
Downstream Deferred GP (9,000) (9,000)
Amortization of Constructive Gain (520) (390) (130)
Total 5,480 1,860 3,620

Income from Avery Co. 37,860 ← Lance Corp.’s % of NI + GP Reversal - Def. GP - Amort of Const. Gain
NCI in NI of Avery Co. 15,620 ← NCI share of NI + GP Reversal - Amort of Const. Gain
Dividends declared 24,000 ← 100% of Avery Co.'s dividends declared
Investment in Avery Co. 184,860 ← Net book value + GP Reversal - Def. GP - Amort of Const. Gain
NCI in NA of Avery Co. 64,620 ← NCI share of BV + GP Reversal - Amort of Const. Gain

Beginning
Inventory
Sales 59,000
COGS 44,000
Gross Profit 15,000
Reversal of last year's deferral:

Investment in Avery Co. 11,250
NCI in NA of Avery Co. 3,750
8-43
P8-25 (continued)
20X7 Downstream Transactions

Ending
Sales 60,000 33,000 27,000
COGS 40,000 22,000 18,000
Gross Profit 20,000 11,000 9,000
Deferral of this year's unrealized profits on inventory transfers

Sales 60,000
Inventory 9,000

Bond Premium 1,920
Investment in Avery Co. Bonds 78,800
Investment in Avery Co. Stock 2,730
NCI in NA of Avery Co. 910
$1,920 = ($3,200 / 10 years) x 6 years

$6,600 = ($80,000 x 0.08) + ($1,600 / 8 years)
$78,800 = $78,400 + [($1,600 / 8 years) x 2 years]
$6,080 = ($80,000 x 0.08) - ($3,200 / 10 years)
$2,730 = ($4,160 - $520) x 0.75
$910 = ($4,160 - $520) x 0.25
8-44
P8-25 (continued)
g.
Lance Avery Elimination Entries

Income Statement
Sales 750,000 320,000 60,000 1,010,000
Interest and Other Income 16,000 5,000 6,600 14,400
Less: COGS (620,000) (240,000) 15,000 (794,000)
51,000
Less: Interest and Other Expenses (35,000) (22,000) 6,080 (50,920)
Income from Avery Co. 37,860 37,860 0

Net Income 103,860 48,000 120,080 72,080 103,860
Ending Balance 337,040 194,000 290,080 96,080 337,040
Balance Sheet
Cash 37,900 48,800 86,700
Other Receivables 30,000 15,000 45,000
Inventory 167,000 120,000 9,000 278,000
Land 90,000 40,000 130,000
Investment in Avery Co. Bonds 78,800 78,800 0
Investment in Avery Co. Stock 176,340 11,250 184,860 0
2,730
1,035,04
Total Assets 0 503,800 0 9,000 1,274,700

Other Payables 40,000 20,000 60,000
Bonds Payable 250,000 200,000 80,000 370,000
Bond Premium 4,800 1,920 2,880
Common Stock 250,000 50,000 50,000 250,000
Additional Paid-in Capital 40,000 40,000
NCI in NA of Avery Co. 3,750 64,620 61,780
910
1,035,04
Total Liabilities & Equity 0 503,800 422,000 160,700 1,274,700
8-45
P8-26 Intercorporate Bond Holdings and Other Transfers
a.
Pond
+ Net Income 7,500 22,500 30,000
- Dividends (2,500) (7,500) (10,000)
Pond Corp.'s
Downstream Extra Depreciation 1,500 1,500
Amortization of Constr. Loss 600 450 150
Total 2,100 1,950 150

Additional Paid-in Capital 20,000 ← Original amount invested (100%)
Income from Skate Co. 24,450 ← Pond Corp.’s % of NI + Extra Depr. + Amort. of Constr. Loss
NCI in NI of Skate Co. 7,650 ← NCI share of NI + Amort. of Constr. Loss
Dividends declared 10,000 ← 100% of Skate Co.'s dividends declared
Investment in Skate Co. 166,950 ← Net book value + Extra Depr. + Amort. of Constr. Loss
NCI in NA of Skate Co. 55,150 ← NCI share of BV + Amort. of Constr. Loss
Accumulated
Building Depreciation
Skate Co. 65,000 Actual 6,500
60,000 1,500 75,000
Pond
Corp. 125,000 As if 80,000
Eliminate the gain on building and correct asset's

basis:
Investment in Skate Co. 15,000
Building 60,000
Accumulated
Depreciation 1,500
Depreciation Expense 1,500
Eliminate the gain on land:

Investment in Skate Co. 9,750
NCI in NA of Skate Co. 3,250
8-46
Land 13,000
8-47
P8-26 (continued)

Investment in Skate Co. Stock 3,150
NCI in NA of Skate co. 1,050
Investment in Skate Co. Bonds 42,400
Bond Discount 1,200
Debt Elimination Entry:

P8-26 (continued)
b.
Pond Skate Elimination Entries
Income Statement
Sales 450,000 250,000 700,000
Interest Income 18,500 3,600 14,900
Less: COGS (285,000) (136,000) (421,000)
Less: Depreciation Expense (35,000) (24,000) 1,500 (57,500)
Less: Other Operating
Expenses (50,000) (40,000) (90,000)
Less: Miscellaneous Expense (11,900) (9,500) (21,400)
Income from Skate Co. 24,450 24,450 0
Controlling Interest in NI 87,050 30,000 35,700 5,700 87,050

Net Income 87,050 30,000 35,700 5,700 87,050
Ending Balance 279,550 170,000 185,700 15,700 279,550
Balance Sheet
Cash 53,100 47,000 100,100
Interest and Other
Receivables 45,000 10,000 2,000 53,000
Inventory 140,000 50,000 190,000
Land 50,000 22,000 13,000 59,000
Buildings & Equipment 400,000 240,000 60,000 700,000
Less: Accumulated
Depreciation (185,000) (94,000) 1,500 75,000 (352,500)
Investment in Skate Co. Stock 139,050 15,000 166,950 0
9,750
3,150
Investment in Skate Co.
Bonds 42,400 42,400 0
Investment in Tin Co. Bonds 134,000 134,000
Total Assets 994,550 340,000 89,400 299,350 1,124,600

Interest and Other Payables 45,000 12,000 2,000 55,000
Bonds Payable 300,000 100,000 40,000 360,000
Bond Discount (3,000) 1,200 (1,800)
Common Stock 150,000 30,000 30,000 150,000
Additional Paid-in Capital 155,000 20,000 20,000 155,000
NCI in NA of Skate Co. 3,250 55,150 50,850
1,050
P8-27A Comprehensive Multiple-Choice Questions (Modified Equity Method)
1. b $374,000 [$200,000 + $180,000 - .30($70,000 - $50,000)]
2. b $294,000 [$220,000 + $140,000 - $2,000 - ($70,000 - $6,000)]
3. a $7,400 [($100,000 x 0.09) - ($6,400 premium / 4 years)]
4. b $32,000 [$24,000 + ($16,000 / 2)]
5. b $13,125 ($293,125 - $200,000 - $50,000 - $30,000)
6. d $83,000 ($50,000 + $30,000 + $3,000)
7. b $3,000 Purchase price

[$106,400 + ($6,400 / 4 years)] $108,000
Book value [$100,000 + $4,000 +
($4,000 / 4 years)] (105,000)
Loss on bond retirement $ 3,000
Reported net income of Grange Corporation $40,000

Add: Inventory profits of prior period
realized in 20X6 2,000
Less: Unrealized inventory profits of
20X6 (6,000)
Less: Loss on bond retirement,
January 1, 20X6 (3,000)
Add: Interest differential in 20X6 600
Realized income of Grange $33,600
Less: Depreciation on differential assigned
to buildings and equipment (3,000)
Less: Impairment of goodwill (7,500)
Adjusted income $23,100
Par value of shares outstanding $200,000

Retained earnings, December 31, 20X6 125,000
Less: Unrealized inventory profit (6,000)
Unrecorded portion of bond
retirement loss ($3,000 - $600) (2,400)
Add: Unamortized differential assigned to
buildings and equipment ($30,000 -
$9,000) 21,000
Unimpaired goodwill ($13,125 - $7,500) 5,625
$343,225
Assigned to noncontrolling interest $ 68,645
($13,125 - $7,500)
P8-28 Comprehensive Problem: Intercorporate Transfers
a. Goodwill as of January 1, 20X7:
Fair value of consideration given by Topp $1,152,000

Fair value of noncontrolling interest at acquisition 128,000
Total $1,280,000
Book value of net assets at acquisition (1,200,000)
Differential at acquisition $ 80,000
Increase in fair value of land (30,000)
Goodwill at acquisition $ 50,000
b. Computation of balance in investment account, January 1, 20X7:
Bussman stockholders' equity, January 1, 20X7:

Common stock $ 500,000
Premium on common stock 280,000
Stockholders' equity, January 1, 20X7 $1,250,000
Topp's ownership share x 0.90
Book value of shares held by Topp $1,125,000
Differential at January 1, 20X7 ($80,000 x 0.90) 72,000
Inventory sale deferred gross profit ($4,500 x 0.90) (4,050)
Balance in Investment in Bussman Stock account,
January 1, 20X7 $1,192,950
Working backwards:
Ending Balance $1,239,840
- Net Income ($100,000 x 0.90) (90,000)
+ Dividends ($40,000 x 0.90) 36,000
- Reversal of 20X6 deferred gross profit ($4,500 x 0.90) (4,050)
+ 20X7 gross profit deferral ($5,400 x 0.90) 4,860
+ Impairment loss ($25,000 x 0.90) 22,500
- Bond retirement gain ($24,000 x 0.90) (21,600)
+ Retirement gain amortization ($6,000 x 0.90) 5,400
Total $ 1,192,950
c. Gain on constructive retirement of Bussman's bonds:
Original proceeds from issuance of Bussman bonds $1,010,000

Premium amortized to January 2, 20X7:
($10,000 / 10) x 6 (6,000)
Book value of bonds at constructive retirement $1,004,000
Price paid for Bussman bonds by Topp (980,000)
Gain on constructive retirement of Bussman's bonds $ 24,000
d. Income to noncontrolling interest, 20X7:
Bussman's 20X7 net income $100,000

Add: 20X6 intercompany profit realized in 20X7 4,500
Constructive gain on retirement of bonds 24,000
Less: Unrealized intercompany profit on 20X7 transfer (5,400)
Portion of constructive gain on bond retirement
recognized currently by separate affiliates
($24,000 / 4 years) (6,000)
Impairment of goodwill (25,000)
Subsidiary income to be apportioned $ 92,100
Noncontrolling interest's proportionate share x 0.10
e. Total noncontrolling interest, December 31, 20X6:
Bussman's stockholders' equity, December 31, 20X6 $1,250,000

Unrealized profit on intercompany sale of inventory (4,500)
Bussman's realized equity, December 31, 20X6 $1,245,500
Differential assigned to land 30,000
Differential assigned to goodwill 50,000
$1,325,500
Total noncontrolling interest, December 31, 20X6 $ 132,550
P8-28 (continued)
f. elimination entries

Premium on
NCI Topp Co. Common Common Retained
10% + 90% = Stock + Stock + Earnings
Original Book
Value 125,000 1,125,000 500,000 280,000 470,000
+ Net Income 10,000 90,000 100,000
- Dividends (4,000) (36,000) (40,000)
Ending Book Value 131,000 1,179,000 500,000 280,000 530,000
Deferred Gain Calculations:

Topp Co.'s
Total = Share + NCI's share
Inventory 20X6 Reversal 4,500 4,050 450
Inventory 20X7 Def. GP (5,400) (4,860) (540)
Bond Retirement Gain 24,000 21,600 2,400
Amortization of Retirement Gain (6,000) (5,400) (600)
Total 17,100 15,390 1,710
Basic elimination entry:

Common Stock 500,000 ← Original amount invested (100%)
Premium on Common Stock 280,000 ← Beginning balance in premium on common stock
Retained Earnings 470,000 ← Beginning balance in retained earnings
Income from Bussman Corp. 105,390 ← Topp's % of NI - Deferred GP + Reversal + Gain - Amort of Gain
NCI in NI of Bussman Corp. 11,710 ← NCI share of NI - Deferred GP + Reversal + Gain - Amort of Gain
Dividends declared 40,000 ← 100% of Bussman Corp.'s dividends declared
Investment in Bussman Corp. 1,194,390 ← Net book value - Deferred GP + Reversal + Gain - Amort of Gain
NCI in NA of Bussman Corp. 132,710 ← NCI share of BV - Deferred GP + Reversal + Gain - Amort of Gain
Excess Value (Differential) Calculations:

Topp Co.
NCI 10% + 90% = Land + Goodwill
Beginning balance 8,000 72,000 30,000 50,000
Changes (2,500) (22,500) (25,000)
Ending balance 5,500 49,500 30,000 25,000
Amortized excess value reclassification entry:

Goodwill Impairment Loss 25,000
Income from Bussman Corp. 22,500
NCI in NI of Bussman Corp. 2,500

Land 30,000
Goodwill 25,000
Investment in Bussman Corp. 49,500
NCI in NA of Bussman Corp. 5,500
P8-28 (continued)

Total = Re-sold + Ending Inventory
Sales 64,000 49,000 15,000
COGS 44,800 34,300 10,500
Gross Profit 19,200 14,700 4,500

Sales 78,000 60,000 18,000
COGS 54,600 42,000 12,600
Gross Profit 23,400 18,000 5,400

NCI in NA of Bussman Corp. 450
Deferral of 20X7 unrealized profits on inventory transfers

Sales 78,000
Inventory 5,400
Eliminate intercompany of Topp's bonds:

Investment in Topp Bonds 200,000
Eliminate intercompany interest

Other Income 20,000
($200,000 x 0.10)
Eliminate accrued interest on intercompany bonds:

Current Payables 5,000
Current Receivables 5,000
($200,000 x 0.10) x 1/4 year
Eliminate intercompany holding of Bussman bonds:

Bonds Payable 1,000,000
Other Income (Interest) 125,000
Investment in Bussman Bonds 985,000
Gain on Retirement of Bonds 24,000
Other Expenses (Interest) 119,000
$125,000 = ($1,000,0000 x 0.12) + $5,000
$24,000 = $1,004,000 - $980,000
$119,000 = ($1,000,000 x 0.12) - $1,000
Eliminate intercompany dividend payable/receivable:

P8-28 (continued)
g.
Bussman Elimination Entries
Topp Corp. DR CR Consolidated
Income Statement
Sales 3,101,000 790,000 78,000 3,813,000
Other Income 135,000 31,000 125,000 21,000
20,000
(2,009,000
Less: COGS ) (430,000) 4,500 (2,361,900)
72,600
Less: Depr. and Amort.
Expense (195,000) (85,000) (280,000)
20,000
Goodwill Impairment Loss 25,000 (25,000)
Gain on Bond Retirement 24,000 24,000
Income from Bussman Corp. 82,890 105,390 22,500 0
NCI in Net Income 11,710 2,500 (9,210)

Beginning Balance 3,028,950 470,000 470,000 3,028,950
Net Income 471,890 100,000 365,100 265,100 471,890
Ending Balance 3,450,840 530,000 835,100 305,100 3,450,840
Balance Sheet
Cash 39,500 29,000 68,500
Current Receivables 112,500 85,100 5,000 183,600
9,000
Inventory 301,000 348,900 5,400 644,500
Land 1,231,000 513,000 30,000 1,774,000
Buildings & Equipment 2,750,000 1,835,000 4,585,000
Less: Accumulated (1,210,000
Depreciation ) (619,000) (1,829,000)
Investment in Bussman Corp. 1,194,39
Stock 1,239,840 4,050 0 0
49,500
Investment in Bussman Corp.
Bonds 985,000 985,000 0
Investment in Topp Bonds 200,000 200,000 0
Goodwill 25,000 25,000
2,448,29
Total Assets 5,448,840 2,392,000 59,050 0 5,451,600
Current Payables 98,000 79,000 5,000 163,000

9,000
1,000,00
Bonds Payable 200,000 1,000,000 0 0
200,000
Premium on Bonds Payable 3,000 3,000
Common Stock 1,000,000 500,000 500,000 1,000,000
Premium on Common Stock 700,000 280,000 280,000 700,000
Retained Earnings 3,450,840 530,000 835,100 305,100 3,450,840
NCI in NA of Bussman Corp. 450 132,710 137,760
5,500
2,832,55
Total Liabilities & Equity 5,448,840 2,392,000 0 443,310 5,451,600
P8-29A Comprehensive Problem: Intercorporate Transfers (Modified Equity Method)
a. Goodwill as of January 1, 20X7:
Fair value of consideration given by Topp $1,152,000

Fair value of noncontrolling interest at acquisition 128,000
Total $1,280,000
Book value of net assets at acquisition (1,200,000)
Differential at acquisition $ 80,000
Increase in fair value of land (30,000)
Goodwill at acquisition $ 50,000
b. Computation of balance in investment account, January 1, 20X7:
Bussman stockholders' equity, January 1, 20X7:

Common stock $ 500,000
Premium on common stock 280,000
Stockholders' equity, January 1, 20X7 $1,250,000
Topp's ownership share x 0.90
Book value of shares held by Topp $1,125,000
Differential at January 1, 20X7 ($80,000 x 0.90) 72,000
January 1, 20X7 $1,197,000
Computation of balance in investment account, December 31, 20X7:

(not required)

January 1, 20X7 $1,197,000
Add: Income from subsidiary, 20X7 90,000
Less: Dividends received ($40,000 x 0.90) (36,000)
December 31, 20X7 $1,251,000
c. Gain on constructive retirement of Bussman's bonds:
Original proceeds from issuance of Bussman bonds $1,010,000

Premium amortized to January 2, 20X7:
($10,000 / 10) x 6 (6,000)
Book value of bonds at constructive retirement $1,004,000
Price paid for Bussman bonds by Topp (980,000)
Gain on constructive retirement of Bussman's bonds $ 24,000
P8-29A (continued)
d. Income to noncontrolling interest, 20X7:
Bussman's 20X7 net income $100,000

Add: 20X6 intercompany profit realized in 20X7 4,500
Constructive gain on retirement of bonds 24,000
Less: Unrealized intercompany profit on 20X7 transfer (5,400)
Portion of constructive gain on bond retirement
recognized currently by separate affiliates
($24,000 / 4 years) (6,000)
Impairment of goodwill (25,000)
Subsidiary income to be apportioned $ 92,100
e. Total noncontrolling interest, December 31, 20X6:
Bussman's stockholders' equity, December 31, 20X6 $1,250,000

Unrealized profit on intercompany sale of inventory (4,500)
Bussman's realized equity, December 31, 20X6 $1,245,500
Differential assigned to land 30,000
Differential assigned to goodwill 50,000
$1,325,500
Total noncontrolling interest, December 31, 20X6 $ 132,550
P8-29A (continued)
f. Elimination entries:

Premium on
NCI Topp Co. Common Common Retained
10% + 90% = Stock + Stock + Earnings
Original Book
Value 125,000 1,125,000 500,000 280,000 470,000
+ Net Income 10,000 90,000 100,000
- Dividends (4,000) (36,000) (40,000)
Ending Book Value 131,000 1,179,000 500,000 280,000 530,000
Deferred Gain Calculations:

Topp Co.'s
Total = Share + NCI's share
Inventory 20X6 Reversal 4,500 4,050 450
Inventory 20X7 Def. GP (5,400) (4,860) (540)
Bond Retirement Gain 24,000 21,600 2,400
Amortization of Retirement Gain (6,000) (5,400) (600)
Total 17,100 15,390 1,710
Basic elimination entry:

Common Stock 500,000 ← Original amount invested (100%)
Premium on Common Stock 280,000 ← Beginning balance in premium on common stock
Retained Earnings 470,000 ← Beginning balance in retained earnings
Income from Bussman Corp. 90,000 ← Topp's % of NI
NCI in NI of Bussman Corp. 11,710 ← NCI share of NI - Deferred GP + Reversal + Gain - Amort of Gain
Dividends declared 40,000 ← 100% of Bussman Corp.'s dividends declared
Investment in Bussman Corp. 1,179,000 ← Net book value
NCI in NA of Bussman Corp. 132,710 ← NCI share of BV - Deferred GP + Reversal + Gain - Amort of Gain

Land 30,000
Goodwill 50,000
Impairment Loss
Goodwill Impairment Loss 25,000
Goodwill 25,000
NCI's portion of impairment loss

NCI in NI of Bussman Corp. 2,500
P8-29A (continued)
Sales 64,000 49,000 15,000
COGS 44,800 34,300 10,500
Gross Profit 19,200 14,700 4,500

Sales 78,000 60,000 18,000
COGS 54,600 42,000 12,600
Gross Profit 23,400 18,000 5,400

NCI in NA of Bussman Corp. 450
Deferral of 20X7 unrealized profits on inventory transfers

Sales 78,000
Inventory 5,400
Eliminate intercompany of Topp's bonds:

Investment in Topp Bonds 200,000
Eliminate intercompany interest

Other Income 20,000
($200,000 x 0.10)
Eliminate accrued interest on intercompany bonds:

($200,000 x 0.10) x 1/4 year
Eliminate intercompany holding of Bussman bonds:

Bonds Payable 1,000,000
Other Income (Interest) 125,000
Investment in Bussman Bonds 985,000
Gain on Retirement of Bonds 24,000
Other Expenses (Interest) 119,000
$125,000 = ($1,000,0000 x 0.12) + $5,000
$24,000 = $1,004,000 - $980,000
$119,000 = ($1,000,000 x 0.12) - $1,000
Eliminate intercompany dividend payable/receivable:

P8-29A (continued)
Bussman Elimination Entries

Topp Corp. DR CR Consolidated
Income Statement
Sales 3,101,000 790,000 78,000 3,813,000
Other Income 135,000 31,000 125,000 21,000
20,000
(2,009,000
Less: COGS ) (430,000) 4,500 (2,361,900)
72,600
Less: Depr. and Amort.
Expense (195,000) (85,000) (280,000)
20,000
Goodwill Impairment Loss 25,000 (25,000)
Gain on Bond Retirement 24,000 24,000
Income from Bussman Corp. 90,000 90,000 0
NCI in Net Income 11,710 2,500 (9,210)


Beginning Balance 3,033,000 470,000 470,000 3,028,950
4,050
Net Income 479,000 100,000 349,710 242,600 471,890
Ending Balance 3,462,000 530,000 823,760 282,600 3,450,840
Balance Sheet
Cash 39,500 29,000 68,500
Current Receivables 112,500 85,100 5,000 183,600
9,000
Inventory 301,000 348,900 5,400 644,500
Land 1,231,000 513,000 30,000 1,774,000
Buildings & Equipment 2,750,000 1,835,000 4,585,000
Less: Accumulated (1,210,000
Depreciation ) (619,000) (1,829,000)
Investment in Bussman Corp. 1,179,00
Stock 1,251,000 0 0
72,000
Investment in Bussman Corp.
Bonds 985,000 985,000 0
Investment in Topp Bonds 200,000 200,000 0
Goodwill 50,000 25,000 25,000
2,480,40
Total Assets 5,460,000 2,392,000 80,000 0 5,451,600
Current Payables 98,000 79,000 5,000 163,000

9,000
1,000,00
Bonds Payable 200,000 1,000,000 0 0
200,000
Premium on Bonds Payable 3,000 3,000
Common Stock 1,000,000 500,000 500,000 1,000,000
Premium on Common Stock 700,000 280,000 280,000 700,000
Retained Earnings 3,462,000 530,000 823,760 282,600 3,450,840
NCI in NA of Bussman Corp. 450 132,710 137,760
2,500 8,000
2,823,71
Total Liabilities & Equity 5,460,000 2,392,000 0 423,310 5,451,600
P8-30A Cost Method (This problem was incorrectly listed as P8-29A)
a. Journal entry recorded by Bennet Corporation:

Cash 6,000
Dividend Income 6,000
Record dividend from Stone Container:
$10,000 x 0.60

Common stock 100,000
Investment in Stone Cont.
Co. 75,000
NCI in NA of Stone Cont.
Co. 50,000
Dividend elimination entry:

Dividend Income 6,000
NCI in NI of Stone Cont. Co. 4,000
Dividend declared 10,000
Assign undistributed income to NCI

NCI in NI of Stone Cont. Co. 16,400
NCI in NA of Stone Cont.
Co. 34,400

NCI in NA of Stone Cont. Co. 2,800
Investment in Stone Cont. Bonds 106,000
Computation of 20X3 constructive loss on bond retirement
Bennett's Bond investment, December 31, 20X4 $106,000

Amortization of premium in 20X4:
Interest income based on par value $9,000
Interest income recorded by Bennett (8,000)
Amortization of premium 1,000
Purchase price paid by Bennett,
December 31, 20X3 $107,000
Bond liability reported by Stone
Container, December 31, 20X3 (100,000)
Constructive loss on bond retirement $ 7,000
P8-29A (continued)
c.
Stone Elimination Entries
Bennett Cont.
Income Statement
Sales 450,000 250,000 700,000
Interest Income 8,000 8,000 0
Less: Other Expenses (368,600) (182,000) (550,600)
Dividend Income 6,000 6,000 0
16,400

18,000
4,200
Net Income 75,400 50,000 34,400 9,000 100,000
Ending Balance 222,600 110,000 81,600 19,000 270,000
Balance Sheet
Cash 61,600 20,000 81,600
Inventory 120,000 110,000 230,000
Other Assets 340,000 250,000 590,000
Investment in Stone Bonds 106,000 106,000 0
Investment in Stone Stock 75,000 75,000 0
Total Assets 802,600 460,000 0 181,000 1,081,600

Bonds Payable 200,000 200,000 100,000 300,000
Common Stock 300,000 100,000 100,000 300,000
NCI in NA of Stone Cont. 2,800 50,000 81,600
34,400

Advanced Financial Accounting 10th Edition Christensen Cottrell Baker Solutions Chapter 8

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Advanced Financial Accounting 10th Edition Christensen Cottrell Baker Solutions Chapter 8

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Chapter 08 - Intercompany Indebtedness

C8-1 Recognition of Retirement Gains and Losses

C8-2 Borrowing by Variable Interest Entities

From: , Accounting Staff

Re: Consolidation of Joint Venture

Case 8-3 Subsidiary Bond Holdings

Bonds Payable 400,000

Bonds Payable 400,000

(a) ($400,000 x 0.08) - ($24,000/15 years)

C8-4 Interest Income and Expense

b. With the information given, the following appears to be true:

C8-5 Intercompany Debt

b. Hershey's intercompany receivables/payables appear to come primarily from intercompany

E8-1 Bond Sale from Parent to Subsidiary

a. Journal entries recorded by Humbolt Corporation:

December 31, 20X2

Interest Receivable 4,500

b. Journal entries recorded by Lamar Corporation:

December 31, 20X2

c. Eliminating entries, December 31, 20X2:

Bonds payable 150,000

Interest payable 4,500

E8-2 Computation of Transfer Price

a. $105,000 = $100,000 par value + ($250 x 20 periods) premium

b. $103,500 = $105,000 - ($250 x 6 periods)

Bonds Payable 100,000

Interest Payable 6,000

E8-3 Bond Sale at Discount

a. $16,800 = [($600,000 x 0.08) + ($12,000 / 5 years)] x 1/3

b. Journal entries recorded by Wood Corporation:

December 31, 20X4

c. Eliminating entries, December 31, 20X4:

Bonds Payable 400,000

Interest Payable 16,000

E8-4 Evaluation of Intercorporate Bond Holdings

E8-5 Multiple-Choice Questions

3. b $4,700 = ($50,000 x 0.10) - ($3,000 / 10 years)

4. a $4,000 = ($50,000 x 0.10) - ($8,000 / 8 years)

5. c $5,600 loss = $58,000 purchase price

6. c Operating income of Kruse Corporation $40,000

E8-6 Multiple-Choice Questions

1. a $14,000 = [($300,000 x 0.09) - ($60,000 / 10 years)]

2. c $12,000 = [$120,000 - ($20,000 / 10 years) x 2 years] - $104,000

3. b Net income of Solar Corporation $30,000

E8-7 Constructive Retirement at End of Year

a. Eliminating entries, December 31, 20X5:

Bonds Payable 400,000

Interest Payable 18,000

b. Eliminating entries, December 31, 20X6:

Bonds Payable 400,000

Interest Payable 18,000

E8-8 Constructive Retirement at Beginning of Year

a. Eliminating entries, December 31, 20X5:

Bonds Payable 400,000

Interest Payable 18,000

b. Eliminating entries, December 31, 20X6:

Bonds Payable 400,000

Interest Payable 18,000

E8-9 Retirement of Bonds Sold at a Discount

Elimination of bond investment at December 31, 20X8:

Bonds Payable 300,000

Computation of book value of liability at constructive retirement

Sale price of bonds ($300,000 x 0.97) $291,000