Beams Aa13e SM 07

Chapter 7
INTERCOMPANY PROFIT TRANSACTIONS — BONDS
Answers to Questions
1 Intercompany borrowing gives rise to notes or advances receivable from and payable to affiliates, as well as
reciprocal interest receivable and payable accounts and interest income and expense accounts.
2 Direct lending and borrowing transactions do not give rise to unrealized gains and losses. Any income reported by
the lender is precisely reciprocal to an expense reported by the borrower, and the transactions are complete on the
date consummated. Similarly, direct lending and borrowing transactions do not give rise to unrecognized gains and
losses since intercompany amounts received and paid are both realized and recognized from the viewpoint of the
separate legal entities.
3 Constructive gains and losses are gains and losses from the viewpoint of the consolidated entity but not from the
viewpoint of the separate affiliates involved. The purchase of a parent’s outstanding bonds by its subsidiary at a
price below the book value of the bonds on the parent’s books results in a constructive gain. Although the bonds are
not actually retired, they are constructively retired from the viewpoint of the consolidated entity because they are no
longer liabilities of the consolidated entity to outside parties.
4 The book value of the liability is $1,004,700, computed as $1,000,000 plus $10,000 minus $5,300. If an affiliate
purchases half of the bonds at 98, it will record a bond investment of $490,000. From the viewpoint of the
consolidated entity, the purchase of the bonds results in a constructive retirement of $500,000 par of bonds payable.
The constructive gain on the bonds is $12,350 [($1,004,700 50%) – $490,000].
5 A constructive gain on bonds is a gain for consolidated statement purposes that is not recorded on the books of the
separate affiliates. The affiliates continue to carry the bonds as a liability (issuer) and investment (purchaser) on their
separate books. Alternatively, an unrealized gain on the sale of land is recorded on the books of the selling affiliate,
but it is not recognized as a gain for consolidated statement purposes because the land is still held within the
consolidated entity. Thus, a constructive gain on bonds is realized and recognized from the viewpoint of the
consolidated entity but it is not recognized on the books of the affiliates. An unrealized gain on the sale of land is
recognized on the books of the selling affiliate but is not realized or recognized from the viewpoint of the
consolidated entity.
6 Constructive gains on intercompany bonds are realized and recognized through the interest income and expense
reported on the separate books of the affiliates. The difference between the interest income reported by the investor
and the interest expense reported by the issuer on the intercompany bonds is the amount of constructive gain
recognized in each period. Constructive gains and losses are recognized in the consolidated financial statements
before they are recognized on the books of the affiliates.
7 If a subsidiary purchases parent bonds at a price in excess of book value, a constructive loss results. The loss is
attributed to the parent since it is the parent bonds that are constructively retired. This approach of associating
constructive gains and losses on intercompany bonds with the issuer is consistent with the procedures used in earlier
chapters of associating gains and losses on intercompany sales transactions with the selling affiliates.
Copyright © 2018 Pearson Education Ltd.

7-1
7-2 Intercompany Profit Transactions — Bonds
8a Assume bonds were purchased at the beginning of the current year
10% bonds payable 50,000

Bond premium 2,000
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

Bond premium 2,000
Investment in S bonds 49,000
Investment in S stock (90%) 3,375
Noncontrolling interest 375
To eliminate reciprocal bond investment and liability amounts,
reciprocal interest income and expense amounts, reciprocal
interest receivable and payable amounts, and adjust controlling
and noncontrolling interest holdings for constructive gain less
piecemeal recognition. The constructive gain is computed as:
$53,000 book value - $48,500 cost = $4,500 of which $750 was
recognized on the books of the affiliate in the prior year.
9 Separate entries are as follows:
Investment in S 40,000
Income from S 40,000
To recognize income equal to 80% of reported
subsidiary income.
Investment in S
4,000
Income from S
4,000
To recognize gain on constructive retirement of
bonds (parent’s books).
The full amount of constructive gain on bonds is recognized as investment
income because we assign the full amount to the parent issuer.

Chapter 7 7-3
10 Investment income from subsidiary
75% of subsidiary’s $100,000 reported income $75,000
Less: 75% of $8,000 constructive loss on retirement of
subsidiary bonds
6,000
Investment income $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 Cost paid to retire 1/2 of Lenka SA’s bonds $550,000

Book value of bonds retired $400,000
(($1,000,000 - $200,000) × 0.5)
Constructive loss on bond retirement $140,000
80% of Petr SA’s net income (80% × $500,000) $400,000

Constructive loss on bond retirement ($140,000)
Piecemeal recognition of constructive loss $28,000
($140,000/5)
Income from Petr SA $288,000
2 Noncontrolling interest share:

20% of Petr SA’s net income (20% × $500,000) $100,000
Solution E7-2
1 Book value of Albert NL’s bonds at January 1, 2014 $2,200,000

Amortization of bonds for 1 year ($200,000/10) ($20,000)
Book value of Albert NL’s bonds at December 31, 2014 $2,180,000
10 percent bonds payable that should be reported:

80% of book value of Albert NL’s bonds $1,774,000
(80% × $2,180,000)
2 Investment in Albert NL is a reciprocal account. Thus it should not be reported

on the consolidated financial statements.
3 Total interest expense for the year $180,000

(($2,000,000 × 10%) – ($200,000/10))
Interest expense that should be reported:

80% of total interest expense (80% × $180,000) $144,000
4 There is no interest income that should be reported because the interest income
is the result of constructive retirement.
Solution E7-3
1 Cost paid to retire 20% of Noa DD’s bonds $185,000

Book value of bonds retired (20% × $800,000) $160,000
Constructive loss on bond retirement $25,000
90% of Noa DD net income (90% × $400,000) $360,000

90% of Constructive loss on bond retirement ($22,500)
(90% × $25,000)
90% of piecemeal recognition of constructive loss $4,500
(90% × $25,000/5)
Income from Noa DD $342,000
2 10% of Noa DD net income (10% × $400,000) $40,000

10% of Constructive loss on bond retirement ($2,500)
(10% × $25,000)
10% of piecemeal recognition of constructive loss $500
(10% × $25,000/5)
Noncontrolling interest share $38,000
Check:
Noncontrolling interest share:
Income from Noa DD × 10%/90% $38,000
Solution E7-4
1 Controlling Share of Consolidated net income (in thousands)
Pop’s separate income $3,200

Add: Income from Son
Share of Son’s income
($2,000 80%) $1,600
Less: Loss on bonds constructively
retired
Book value
($4,000 - $160) 40% $1,536
Cost to Son 1,600 (64)
Add: Piecemeal recognition of loss
($64,000/4 years) 16 1,552
Controlling Share of Consolidated $4,752
net income
2 Noncontrolling interest share
Son’s reported income

$2,000 20% $ 400

Chapter 7 7-5

Solution E7-5
Pam Corporation and Subsidiary

Consolidated Income Statement
for the year ended December 31, 2024
(in thousands)
Sales $ 1,500
Less: Cost of sales (870)
Gross profit 630

Add: Gain on constructive retirement of bondsb 6
Less: Operating expenses (250)
Operating profit 386

Other Items:
Bond interest expensea (30)
Consolidated net income $ 356
a
Pam’s bond interest expense $50,000 less interest on bonds held intercompany $20,000 =
$30,000.
b
Book value of Pam’s bonds purchased $200,000 less purchase price $194,000 = $6,000 gain
on constructive retirement.

Chapter 7 7-7
Solution E7-6
1 Constructive loss
Cost paid to retire 1/2 of Son’s bonds $503,000

Book value of bonds retired ($990,000 .5) 495,000
Constructive loss on bond retirement $ 8,000
2 Income from Son
Share of Son’s reported income $14,000 70% $ 9,800

Less: Constructive loss $8,000 70% (5,600)
Add: Piecemeal recognition of constructive loss
($8,000/4 years) 70% 1,400
Income from Son $ 5,600
Solution E7-7
1 a
January 1, 2016 cost of $400,000 par bonds $391,000
Book value acquired ($2,000,000 + $90,000 premium) 20% 418,000
Constructive gain $ 27,000
2 b
Constructive gain $27,000/5 years 4 years $ 21,600
3 c
Book value $2,072,000 80% outstanding $1,657,600

Solution E7-8
1a Constructive gain
Book value of bonds January 1, 2017 $485,000

Amortization for 6 months ($15,000/4 years 1/2 year) 1,875
Book value of bonds July 1, 2017 486,875
Percent purchased by Son 60%
Book value of bonds purchased $292,125

Purchase price 287,400
Constructive gain $ 4,725
1b Consolidated bond interest expense for 2017
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% 8,750
Consolidated bond interest expense $ 30,625
1c Bond liability of Pop
Pop Discount Book Value

January 1, 2017 $500,000 $15,000 $485,000
Amortization 2017 ________ - 3,750 + 3,750
December 31, 2017 $500,000 $11,250 $488,750
Consolidated bond liability $488,750 40% outstanding $195,500
2 The amounts would not be different if Son had been the issuer and Pop the
purchaser. However, the constructive retirement gains would ‘belong’ to Son and
would have been allocated to both Pop and the noncontrolling interests in Son.

Chapter 7 7-9
Solution E7-9 (amounts in thousands)
Subsidiary purchases parent company bonds:

1a Gain on constructive retirement of bonds
Book value of Pam’s bonds constructively
retired ($5,000 - $100 unamortized
discount) 40% $1,960
Purchase price of $1,000 par bonds 1,900
Gain on constructive bond retirement $ 60
1b Consolidated interest payable

($3,000 + $1,000) 10% interest 1/2 year $ 200
1c Bonds payable at par ($3,000 + $1,000) $4,000
1d None But Sun’s investment in Pam’s bonds will be $1,920.
Cost January 2 $1,900

Add: Amortization ($100,000/5 years) 20
$1,920
Parent purchases subsidiary bonds:

2a Loss on constructive retirement of bonds
Sun’s bonds payable ($1,000 + $20) $1,020
Price paid by Pam 1,030
Loss on constructive retirement of bonds $ (10)
2b Consolidated interest expense

Pam’s bonds ($5,000 10% interest)
+ $20 amortization $ 520
2c None Interest receivable of $50 is eliminated in consolidation.
2d Book value of bonds payable

Pam’s bonds December 31, 2016 $4,900
Add: Amortization for 2017 ($100 / 5 years) 20
Book value of bonds payable $4,920

Solution E7-10 (in thousands)
1 Gain from constructive retirement of bonds

Book value of bonds purchased by Son
($8,000 + $240) 25% $2,060
Price paid by Son 1,960
Gain from constructive retirement of bonds $ 100
2 Working paper entry to eliminate effect of intercompany bond holdings

Interest incomea 248
Interest payable 120
Investment in Pop’s bonds 1,968
Gain on retirement of bonds 100
Interest expenseb 228
Interest receivable 120
a
($2,000 12% interest) + $8 amortization = $248
b
[($8,000 12%) - $48 amortization] 25% intercompany = $228
3 Consolidated income statement amounts — 2018

a Constructive gain None
b Noncontrolling interest share ($1,200 20%) $ 240
c Bond interest expense

[($8,000 12%) - $48] 75% outsiders $ 684
d Bond interest income None
4 Consolidated balance sheet amounts — December 31, 2018

a Investment in Pop’s bonds None
b Book value of bonds payable

($8,000 + $144) 75% outsiders $6,108
c Bond interest receivable None
d Bond interest payable

$8,000 12% 75% outsiders 1/2 year $ 360

Chapter 7 7-11
Solution E7-11
Preliminary computations:
Book value of Sun bonds on January 1, 2017 $1,000,000

Purchase price paid by Pam 783,000
Gain on constructive retirement of Sun’s bonds $ 217,000
Amortization of gain on bonds ($217,000/7 years) $ 31,000
Computation of noncontrolling interest share:

Share of Sun’s reported income ($140,000 20%) $ 28,000
Add: Share of constructive gain ($217,000 20%) 43,400
Less: Piecemeal recognition of constructive gain ($31,000 20%)
(6,200)
Noncontrolling interest share $ 65,200

Consolidated Income Statement
(in thousands)
Sales $1,800
Less: Cost of sales 950
Gross profit 850

Add: Gain from constructive retirement of Sun’s bonds 217
Less: Operating expenses 400
Consolidated net income $ 667
Less: Noncontrolling interest share 65.2
Controlling interest share of NI $ 601.8

Solution E7-12
1 Pop Corporation and Subsidiary, December 31, 2016

Amounts Appearing
in Consolidated
Financial
Statements
Interest receivable 0
Investment in Son’s bonds 0
Interest payable ($40,000 90%) 36,000
8% bonds payable (($1,000,000 90%)- 13,500 886,500
discount)
Interest income 0
Interest expense ($86,000/2) + .9(86,000/2) 81,700
Loss on constructive retirement of bonds 7,800a
a
Computation of loss on intercompany bonds
Balance of investment in bonds at December 31, 2016 $105,000

Add: Amount amortized for July 1 to December 31, 2016
($5,000 balance at December 31 30/36 months = $6,000 unamortized
at July 1) 1,000
Investment cost July 1, 2016 $106,000
Less: Book value acquired [$1,000,000 - ($15,000
unamortized discount at December 31 30/36 months)] 10% 98,200
Loss on constructive retirement of bonds $ 7,800
2 Consolidation working paper entries at December 31, 2016

Loss on retirement of bonds 7,800
Investment in Son’s bonds 105,000
To eliminate intercompany bonds, record constructive loss on retirement,
and eliminate intercompany interest income and expense.

To eliminate reciprocal interest payable and receivable amounts.
3 Consolidation working paper entries at December 31, 2017

Investment in Son (80%) 5,200
Noncontrolling interest(20%) 1,300
Investment in Son’s bonds 103,000
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 Son and 20% to the noncontrolling
interest.

Chapter 7 7-13
To eliminate reciprocal interest payable and receivable amounts.

Solution E7-13
1 Gain on constructive retirement of bonds
Purchase price of bonds $ 97,600

Book value 100,000
Gain on constructive retirement of bonds $ 2,400
2 Son accounts for its investment in Pop’s bonds
January 2, 2018
Investment in Pop’s bonds 97,600
Cash 97,600
To record investment in $100,000 par, 8% Pop bonds.
July 1, 2018
Cash 4,000
Investment in Pop’s bonds 400
To record interest and amortization.
December 31, 2018

Investment in Pop’s bonds 400
To accrue interest and record amortization.
3 Pop accounts for its bonds payable

January 1, 2018
Interest Payable 8,000
Cash 8,000
To record interest payment.
July 1, 2018
Cash 8,000
To record interest payment for 6 months.
December 31, 2018

To accrue interest for 6 months.
4 Pop accounts for its investment in Son
December 31, 2018

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.

Chapter 7 7-15
5 Noncontrolling interest share ($100,000 20%) $ 20,000
Controlling share of NI ($400,000 + $81,600) $481,600

Consolidated net income $501,600

SOLUTIONS TO PROBLEMS
Solution P7-1
90% of Merry SA’s net income $720,000

(90% × ($3,700,000 + $200,000 –
$2,400,000 - $700,000))
Unrealized profit from ending inventory ($100,000)b
(100% × $100,000)
Unrealized gain on sale of land ($180,000)
(90% × ($1,000,000 - $800,000)
Unrealized gain on sale of equipment ($100,000)d
(100% × $100,000)
Constructive gain on bond retirement $60,000
(($1,000,000/2) - $440,000))
Piecemeal recognition of constructive gain ($20,000)
($60,000/3)
Income from Merry SA’s $380,000
10% of Merry SA’s net income $80,000

(10% × ($3,700,000 +$200,000 –
$2,400,000 - $700,000))
Unrealized gain on sale of land ($20,000)
(10% × ($1,000,000 - $800,000)
Noncontrolling interest share: $60,000i
Investment in Merry SA before adjustment $3,600,000

Add: Income from Merry SA $380,000
Adjusted investment in Merry SA $3,980,000
Unadjusted ending investment in Merry SA $3,600,000

Add: Dividends ($100,000 × 90%) $90,000
Beginning investment in Merry SA $3,690,000
Implied fair value of Merry SA ($3,690,000 / 90%) $4,100,000
Beginning Merry SA’s stockholders’ equity $4,085,000
($2,000,000 + $2,085,000)
Goodwill $15,000j

Chapter 7 7-17
Solution P7-1 (continued)
THANOS SA AND SUBSIDIARY CONSOLIDATION WORKPAPER FOR THE YEAR ENDED DECEMBER 31, 2014
(IN THOUSANDS)
Thanos Merry Adjustments and Consolidated
SA SA Eliminations Statements
Debits Credits
Income Statement
Sales $ 4,800 $ 3,700 a. 800 $ 7,700
Income from Merry SA $ 380 h. 380
Gain on sale of land $ 200 c. 200
Gain on sale of equipment $ 100 d. 100
Interest income $ 70 f. 70
Gain on retirement of bonds e. 40 $ 60
f. 20
-$ 2,800 -$ b. 100 a. 800 -$ 4,500
Cost of sales
2,400
Interest expense -$ 100 f. 50 -$ 50
Other expenses -$ 1,100 -$ 700 -$ 1,800
Noncontrolling interest share i. 60 -$ 60
Controlling share of net income $ 1,350 $ 800 $ 1,350
Retained Earnings Statement
Retained earnings - Thanos SA $ 3,380 $ 3,380
Retained earnings - Merry SA $ 2,085 j. 2085
Controlling share of net income $ 1,350 $ 800 $ 1,350

Dividends -$ 300 -$ 100 h. 90 -$ 300
i. 10
Retained earnings - December 31 $ 4,430 $ 2,785 $ 4,430


Balance Sheet
Cash $ 700 $ 600 $ 1,300
Accounts receivable $ 1,000 $ 400 $ 1,400
Interest receivable $ 25 g. 25
Inventory $ 1,100 $ 700 b. 100 $ 1,700
Land $ 1,900 $ 800 c. 200 $ 2,500
Equipment-net $ 1,100 $ 1,400 d. 100 $ 2,400
Building-net $ 2,000 $ 1,400 $ 3,400
Investment in Thanos SA bonds $ 460 e. 460
Investment in Merry SA $ 3,980 h. 290
j. 3690
Goodwill j. 15 $ 15
Total Assets $ 11,780 $ 5,785 $ 12,715

Accounts payable $ 1,300 $ 1,000 $ 2,300
Interest payable $ 50 g. 25 $ 25
10% bonds payable $ 1,000 e. 500 $ 500
Common stock $ 5,000 $ 2,000 j. 2000 $ 5,000
Retained earnings $ 4,430 $ 2,785 $ 4,430
$ 11,780 $ 5,785
Noncontrolling interest January 1 j. 410
Noncontrolling interest December 31 i. 50 $ 460

Total liabilities and equities $ 12,715

Chapter 7 7-19
Solution P7-2
80% of Nuro AO’s net income $1,520,000
(80% × ($12,000,000 + $1,000,000 - $8,800,000 –
$200,000 – $2,100,000))
Unrealized profit from ending inventory ($80,000)
(80% × $1,000,000 / 2 × 20%)
Unrealized gain on sale of building ($800,000)
(80% × ($5,000,000 - $4,000,000))
Piecemeal recognition of gain on sale of building $40,000
(80% × ($5,000,000 - $4,000,000) / 10 / 2)
(80% × ($900,000 - $800,000)
Piecemeal recognition of constructive gain $40,000
(80% × ($900,000 – $800,000) / 2)
Income from Nuro AO’s $640,000
20% of Nuro AO’s net income $380,000

(20% × ($12,000,000 + $1,000,000 - $8,800,000 –
$200,000 – $2,100,000))
Unrealized profit from ending inventory ($20,000)
(20% × $1,000,000 / 2 × 20%)
Unrealized gain on sale of building ($200,000)
(20% × ($5,000,000 - $4,000,000))
Piecemeal recognition of gain on sale of building $10,000
(20% × ($5,000,000 - $4,000,000) / 10 / 2)
(20% × ($900,000 - $800,000)
Piecemeal recognition of constructive gain $10,000
(20% × ($900,000 – $800,000) / 2)
Noncontrolling interest share: $160,000i
Investment in Nuro AO before adjustment $7,360,000

Add: Income from Nuro AO $640,000
Adjusted investment in Nuro AO $8,000,000
Price to acquire 80 percent interest of Nuro AO $8,000,000

Implied fair value of Nuro AO ($8,000,000/80%) $10,000,000
Beginning Merry SA’s stockholders’ equity $10,000,000
($5,000,000 + $5,000,000)
Goodwill $0

KEN AO AND SUBSIDIARY CONSOLIDATION WORKPAPER FOR THE YEAR ENDED DECEMBER 31, 2014 (IN THOUSANDS)
Ken AO Nuro AO Adjustments and Consolidated

Eliminations Statements
Debits Credits
Income Statement
$ 14,000 $ a. 1,000 $ 25,000
Sales
12,000
Income from Nuro AO $ 640 h. 640
Gain on sale of building $ 1,000 c. 1000
Interest income $ 150 f. 150
Loss on retirement of bonds e. 50 -$ 100
f. 50
-$ -$ b. 100 a. 1,000 -$ 19,000
Cost of sales
11,100 8,800
Interest expense -$ 200 f. 200
-$ 1,700 -$ d. 50 -$ 3,750
Other expenses
2,100
Noncontrolling interest share i. 160 -$ 160
Controlling share of net income $ 1,990 $ 1,900 $ 1,990
Retained Earnings Statement
Retained earnings - Ken AO $ 12,000 $ 12,000
Retained earnings - Nuro AO $ 5,000 j. 5000
Controlling share of net income $ 1,990 $ 1,900 $ 1,990

Dividends -$ 500 -$ 800 h. 640 -$ 500
i. 160
Retained earnings - December 31 $ 13,490 $ 6,100 $ 13,490


Chapter 7 7-21
Balance Sheet
Cash $ 1,500 $ 2,000 $ 3,500
Accounts receivable $ 3,640 $ 1,900 $ 5,540
Interest receivable $ 100 g. 100
Inventory $ 1,600 $ 1,800 b. 100 $ 3,300
Land $ 2,000 $ 4,200 $ 6,200
Equipment-net $ 2,100 $ 1,100 $ 3,200
Building-net $ 6,000 $ 2,000 d. 50 c. 1,000 $ 7,050
Investment in Nuro AO bonds $ 950 e. 950
Investment in Nuro AO $ 8,000 j. 8000

$ 25,890 $ $ 28,790
Total Assets
13,000

Accounts payable $ 2,400 $ 900 $ 3,300
Interest payable $ 100 g. 100
10% bonds payable $ 900 e. 900
Common stock $ 10,000 $ 5,000 j. 5000 $ 10,000
Retained earnings $ 13,490 $ 6,100 $ 13,490

$ 25,890 $

13,000
Noncontrolling interest January 1 j. 2,000
Noncontrolling interest December 31 $ 2,000

Total liabilities and equities $ 28,790

Solution P7-3
Income from Sun for 2016:
Share of reported income of Sun ($400,000 75%) $ 300,000

Add: Unrealized profit in beginning inventory of Sun 48,000
Less: Unrealized profit in ending inventory of Sun (60,000)
Add: Piecemeal recognition of gain on sale of equipment
to Pam ($96,000/6 years) 75% 12,000
Less: Unrealized gain on sale of land to Sun (40,000)
Less: Unrealized gain on sale of building to Sun less
piecemeal recognition through depreciation ($80,000 - $4,000) (76,000)
Add: Gain on constructive retirement of Pam’s bonds
($400,000 - $376,000) 24,000
Income from Sun $ 208,000
Investment in Sun at December 31, 2016:
Underlying equity in Sun ($2,080,000 75%) $1,560,000

Less: Unrealized profit in Sun’s ending inventory
(60,000)
Less: Unrealized gain on equipment sold to Pam
($96,000 - $48,000 recognized) 75%
(36,000)
Less: Unrealized gain on sale of land to Sun
(40,000)
Less: Unrealized gain on sale of building to
Sun ($80,000 - $4,000 recognized)
(76,000)
Add: Gain on constructive retirement of Pam’s bonds 24,000
Investment in Sun December 31 $1,372,000
Net income of Sun $400,000

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

Chapter 7 7-23
Consolidation Working Paper
(in thousands)
Adjustments and Consolidated
Pam Sun 75% Eliminations Statements
Income Statement
Sales $ 2,520 $ 2,000 b 200 $4,320
Gain on land 40 l 40
Gain on building 80 f 80
Income from Sun 208 h 208
Gain on bonds g 24 24
Cost of sales 1,400* 1,200* d 60 b 200
c 48 2,412*
Depreciation expense 304* 160* e 16
f 4 444*
Interest expense 80* 80*
Other expenses 184* 240* 424*
Consolidated NI 984
Noncontrolling int. k 104 104*
share
Controlling share of NI $ 880 $ 400 $ 880
Retained Earnings
Retained earnings — Pam $ 600 $ 600
Retained earnings — Sun $ 400 i 400
Controlling share of NI 880✔ 400✔ 880
Dividends 640* 320* h 240
k 80 640*
Retained earnings, Dec. $ 840 $ 480 $ 840
31
Balance Sheet
Cash $ 108 $ 324 a 40 $ 472
Bond interest receivable 20 j 20
Other receivables 160 120 a 40 240
Inventories 320 200 d 60 460
Land 360 280 l 40 600
Buildings — net 600 720 f 76 1,244
Equipment — net 560 360 e 48 872
Investment in Sun stock 1,372 c 48 i 1,500
e 48
h 32
Investment in Pam bonds _______ 376 g 376 ______
$ 3,480 $ 2,400 $3,888
Accounts payable $ 200 $ 320 $ 520
Bond interest payable 40 j 20 20
10% bonds payable 800 g 400 400
Common stock 1,600 1,600 i 1,600 1,600
Retained earnings 840✔ 480✔ 840
$ 3,480 $ 2,400
Noncontrolling interest January 1 e 16 i 500
Noncontrolling interest December 31 _______ k 24 508
3,296 3,296 $3,888

*Deduct

Chapter 7 7-25
Solution P7-4
Preliminary Computations (amounts in thousands):

Acquisition price $ 640
Implied fair value of Son ($640 / 80%) $ 800
Son’s book value (600)
Excess allocated to plant & equipment with 8 year life $ 200
Annual depreciation of excess ($200 / 8 years) $ 25
1 Loss is from the constructive retirement of bonds

Purchase price of bonds $212
Book value of bonds ($200 + $6 premium) 206
Loss on retirement of bonds $ 6
2 Consolidated sales
Combined sales $560
Less: Intercompany sales 100
Consolidated sales $460
3 Consolidated cost of goods sold

Combined cost of goods sold $ 340
Less: Intercompany sales (100)
Less: Unrealized profits in beginning inventory (40)
Add: Unrealized profits in ending inventory 20
Consolidated cost of goods sold $ 220
4 Unrealized profit in beginning inventory

Forced computations ($340 + $20) - ($100 + $220) $ 40
5 Unrealized profit in ending inventory

Combined inventories ($200 + $100) $300
Less: Consolidated inventories 280
Unrealized profit in ending inventory $ 20
6 Consolidated accounts receivable

Combined accounts receivable ($240 + $120) $360
Less: Intercompany receivables 30
Consolidated accounts receivable $330
7 Noncontrolling interest share

Son’s reported net income $ 60
Less: Depreciation of excess (25)
Add: Unrealized profit in beginning inventory 40
Less: Unrealized profit in ending inventory (20)
Son’s realized income 55
Noncontrolling interest share $ 11

8 Noncontrolling interest December 31, 2018

Beginning noncontrolling interest (($670 + $150 unamortized
excess) 20%) $164
Less: Unrealized profit in beginning inventory
($40 20%) (8)
Less: Noncontrolling interest dividends ($30 20%) (6)
Add: Noncontrolling interest share 11
Noncontrolling interest December 31 $161
Alternative computation:
Ending equity of Son ($700 + $125 unamortized excess)(
20%) $165
Less: Unrealized profit in ending inventory ($20 20%) (4)
Noncontrolling interest December 31, 2018 $161
9 Investment in Son stock at December 31, 2017

Investment in Son stock at cost $640
Add: Changes in retained earnings to December 31, 2017
($270 - $200) 80% 56
Less: 80% of Excess of ($200/8 years) = $20 per year 2
years (40)
Less: Unrealized profit in beginning inventory
($40 80%) (32)
Investment in Son stock December 31, 2017 $624
Alternative computation:
Less: Income from Son for 2018 (40)
Add: Dividends from Son ($30 80%) 24
10 Income from Son

Share of Son’s reported net income $ 60
Less: Depreciation on excess ($200/8 years) (25)
Add: Unrealized profit in beginning inventory 40
Less: Unrealized profit in ending inventory (20)
Son’s adjusted and realized income $ 55
Pop’s 80% controlling share $ 44
Less: Constructive loss on retirement of bonds
($6 - $2) (4)
Pop’s income from Son $ 40

Chapter 7 7-27
Solution P7-5 [AICPA adapted]
1 Consolidated cash ($50,000 + $15,000) $ 65,000
2 Equipment — net ($800,000 equipment - $320,000 accumulated

depreciation - $21,000 unrealized profit + $7,000 profit
realized through depreciation of excess) $466,000
3 Investment in Sun does not appear in consolidated

statements.
4 Bonds payable (Sun’s bonds payable of $200,000 1/2 held

outside the consolidated entity) $100,000
5 Common stock (Pam’s stock) $100,000
6 Beginning retained earnings (Pam’s retained earnings) $272,000
7 Dividends declared (Pam’s dividends) $ 80,000
8 Gain on retirement of bonds (Book value of Sun’s

bonds acquired by Pam $100,000 less acquisition cost
of $91,000. Since bonds were acquired on December 31,
2016, none of the $9,000 gain has been amortized.) $ 9,000
9 Cost of goods sold ($860,000 combined - $60,000

intercompany sales + $10,000 unrealized profit in
ending inventory) $810,000
10 Interest expense (Sun paid interest for the entire year to

outside entities so all of Sun’s interest is reported) $ 16,000
11 Depreciation expense ($45,000 combined - depreciation on

the unrealized gain $7,000) $ 38,000

Solution P7-6
Income from Son for 2017:
Share of reported income of Son ($200,000 75%) $150,000

Add: Unrealized profit in beginning inventory of Son 24,000
Less: Unrealized profit in ending inventory of Son (30,000)
Add: Piecemeal recognition of gain on sale of equipment
to Pop ($48,000/6 years) 75% 6,000
Less: Unrealized gain on sale of land to Son (20,000)
Less: Unrealized gain on sale of building to Son less
piecemeal recognition through depreciation ($40,000 - $2,000) (38,000)
Add: Gain on constructive retirement of Pop’s bonds
($200,000 - $188,000) 12,000
Income from Son for 2017 $104,000
Investment in Son at December 31, 2017:
Underlying equity in Son ($1,040,000 75%) $780,000

Less: Unrealized profit in Son’s ending inventory (30,000)
Less: Unrealized gain on equipment sold to Pop
($48,000 - $24,000 recognized) 75% (18,000)
Less: Unrealized gain on sale of land to Son (20,000)
Less: Unrealized gain on sale of building to
Son ($40,000 - $2,000 recognized) (38,000)
Add: Gain on constructive retirement of Pop’s bonds 12,000
Investment in Son December 31 $686,000
Net income of Son $200,000

Add: Piecemeal recognition of gain on
equipment ($48,000/6 years) 8,000
Son’s realized income 208,000
Noncontrolling interest share $ 52,000

Chapter 7 7-29
Pop Corporation and Subsidiary
Consolidation Working Papers
(in thousands)
Adjustments and Consolidated
Pop Son 75% Eliminations Statements
Income Statement
Sales $ 1,260 $ 1,000 b 100 $2,160
Gain on plant 60 f 60
Income from Son 104 h 104
Gain on bonds g 12 12
Cost of sales 700* 600* d 30 b 100
c 24 1,206*
Depreciation expense 152* 80* e 8
f 2 222*
Interest expense 40* 40*
Operating expense 92* 120* 212*
Consolidated NI 492
Noncontrolling int. k 52 52*
share
Controlling share of NI $ 440 $ 200 $ 440
Retained Earnings
Retained earnings — Pop $ 300 $ 300
Retained earnings — Son $ 200 i 200
Controlling share of NI 440✔ 200✔ 440
Dividends 320* 160* h 120
k 40 320*
Retained earnings
December 31 $ 420 $ 240 $ 420
Balance Sheet
Cash $ 54 $ 162 a 20 $ 236
Bond interest receivable 10 j 10
Other receivables 80 60 a 20 120
Inventories 160 100 d 30 230
Land 180 140 f 20 300
Buildings — net 300 360 f 38 622
Equipment — net 280 180 e 24 436
Investment in Son stock 686 c 24 i 750
e 24
h 16
Investment in Pop bonds ____ __ 188 g 188 ______
$ 1,740 $1,200 $1,944
Accounts payable $ 100 $ 160 $ 260
Bond interest payable 20 j 10 10
10% bonds payable 400 g 200 200
Common stock 800 800 i 800 800
Retained earnings 420✔ 240✔ 420
$1,740 $1,200
Noncontrolling interest January 1 e 8 i 250
Noncontrolling interest December 31 _____ k 12 254

1,648 1,648 $1,944

*Deduct

Chapter 7 7-31
Solution PR 7-1
Fair value should be estimated based on quoted market prices for similar issues or on
current rates for issues with similar maturity dates. (ASC 825-10-55-4).
Solution PR 7-2
Mandatorily redeemable preferred stock must be classified as a liability unless the
redemption will occur only upon liquidation or termination of the entity.(ACS
480-10-25-5).

Beams Aa13e SM 07

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Chapter 7

INTERCOMPANY PROFIT TRANSACTIONS — BONDS

Copyright © 2018 Pearson Education Ltd.

8a Assume bonds were purchased at the beginning of the current year

10% bonds payable 50,000

8b Assume bonds were purchased one year earlier

10% bonds payable 50,000

9 Separate entries are as follows:

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1 Cost paid to retire 1/2 of Lenka SA’s bonds $550,000

80% of Petr SA’s net income (80% × $500,000) $400,000

2 Noncontrolling interest share:

1 Book value of Albert NL’s bonds at January 1, 2014 $2,200,000

10 percent bonds payable that should be reported:

2 Investment in Albert NL is a reciprocal account. Thus it should not be reported

3 Total interest expense for the year $180,000

Interest expense that should be reported:

Copyright © 2018 Pearson Education Ltd.

80% of total interest expense (80% × $180,000) $144,000

1 Cost paid to retire 20% of Noa DD’s bonds $185,000

90% of Noa DD net income (90% × $400,000) $360,000

2 10% of Noa DD net income (10% × $400,000) $40,000

1 Controlling Share of Consolidated net income (in thousands)

Pop’s separate income $3,200

2 Noncontrolling interest share

Son’s reported income

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Copyright © 2018 Pearson Education Ltd.

Pam Corporation and Subsidiary

Gross profit 630

Operating profit 386

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Cost paid to retire 1/2 of Son’s bonds $503,000

2 Income from Son

Share of Son’s reported income $14,000 70% $ 9,800

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Book value of bonds January 1, 2017 $485,000

Percent purchased by Son 60%

Book value of bonds purchased $292,125

Constructive gain $ 4,725

1b Consolidated bond interest expense for 2017

Bond interest expense January 1 to July 1

Bond interest expense July 1 to December 31

Consolidated bond interest expense $ 30,625

1c Bond liability of Pop

Pop Discount Book Value

Consolidated bond liability $488,750 40% outstanding $195,500

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Subsidiary purchases parent company bonds:

1b Consolidated interest payable

1c Bonds payable at par ($3,000 + $1,000) $4,000

1d None But Sun’s investment in Pam’s bonds will be $1,920.

Cost January 2 $1,900

Parent purchases subsidiary bonds:

2b Consolidated interest expense

2c None Interest receivable of $50 is eliminated in consolidation.

2d Book value of bonds payable

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Solution E7-10 (in thousands)

1 Gain from constructive retirement of bonds

2 Working paper entry to eliminate effect of intercompany bond holdings

3 Consolidated income statement amounts — 2018

b Noncontrolling interest share ($1,200 20%) $ 240