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Intercompany profit transactions bonds

Intercompany profit transactions bonds

 

 

Intercompany profit transactions bonds

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 interest payable accounts and interest income and interest 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 affiliated companies involved. The purchase of a parent company’s outstanding bonds by its subsidiary at a price below the book value of the bonds on the parent company’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 affiliated company 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 affiliated companies. The affiliated companies 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 affiliated companies. 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 interest expense reported on the separate books of the affiliated companies. The difference between the interest income reported by the investing affiliate and the interest expense reported by the issuing affiliate 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 affiliated companies.

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

 

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

 

 

10% bonds payable

52,000

 

 

Interest income

5,250

 

 

Interest payable

2,500

 

 

            Investment in S bonds

 

49,000

 

            Interest expense

 

4,500

 

            Interest receivable

 

2,500

 

            Constructive gain on bonds

 

3,750

 

To eliminate reciprocal bond investment and bond liability amounts, reciprocal interest income and interest expense amounts, reciprocal interest receivable and interest payable amounts, and enter the constructive gain on bonds. The constructive gain is computed as the $52,500 book value of bonds that were retired for $48,750.

 

8b           Assume bonds were purchased one year earlier

 

 

10% bonds payable

52,000

 

 

Interest income

5,250

 

 

Interest payable

2,500

 

 

            Investment in S bonds

 

49,000

 

            Interest expense

 

4,500

 

            Interest receivable

 

2,500

 

            Investment in S stock (90%)

 

3,375

 

            Noncontrolling interest

 

375

 

To eliminate reciprocal bond investment and bond liability amounts, reciprocal interest income and interest expense amounts, reciprocal interest receivable and interest payable amounts, and adjust majority 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 separate affiliated companies 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 the constructive gain on bonds is recognized as investment income because the full amount is assigned to the parent company issuer.

 

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 company since the issuer reports interest expense.

 

11c         The $200 difference between interest income and interest expense represents a piecemeal recognition of the constructive gain on the books of the separate companies.

 

12           Intercompany receivables and payables of associated companies (equity investees) are generally aggregated with the investments in such companies. In other words, receivables from associates are usually added to the investments in associates and payables are generally deducted from the investments in order to show the equity of the investor in its equity investees in a single amount, with separate disclosure of the components of such equity, either parenthetically or in statement notes.

 

SOLUTIONS TO EXERCISES

 

Solution E7-1

 

1

c

3

D

2

a

4

A

 

 

Solution E7-2

 

1

a

 

 

Book value of Pavone bond’s acquired by

 

 

  Showalter ($900,000 + $48,000) 2/3

$632,000

 

Cost to Showalter

 602,000

 

Constructive gain

$ 30,000

2

d

 

 

Nominal interest on Pavone’s remaining

 

 

  outstanding bonds $300,000 8%

$ 24,000

 

Less: Amortization of premium ($48,000 1/3)/ 4 years

   4,000

 

Interest expense on consolidated income statement

$ 20,000

 

 

Solution E7-3

 

1

c

 

 

Cost of $80,000 par of Palmer bonds January 1, 2005

$ 76,000

 

Book value acquired ($400,000 par - $8,000 discount) 20%

  78,400

 

Constructive gain

$  2,400

2

d

 

 

Par value of bonds payable

$400,000

 

Less: Unamortized discount ($8,000 - $2,000)

  (6,000)

 

Book value of bonds

 394,000

 

Percent outstanding

      80%

 

Bonds payable

$315,200

3

c

 

 

Constructive gain $2,400/4 years 3 years

$  1,800

4

c

 

 

Nominal interest

$ 40,000

 

Add: Amortization of discount

   2,000

 

 

  42,000

 

Percent outstanding

      80%

 

Interest expense

$ 33,600

 

5     b

      Piecemeal recognition of gain is $2,400 25% in 2006.

 

Solution E7-4

 

1     Consolidated net income

 

 

Paul’s separate income

 

 

$  800,000

 

Add: Income from Sally

 

 

 

 

Share of Sally’s income

 

 

 

 

  ($500,000 80%)

 

$400,000

 

 

Less: Loss on bonds constructively

  retired

 

 

 

 

      Book value

        ($1,000,000 - $40,000)

          40%

 

 

$384,000

 

 

 

      Cost to Sally

 400,000

 (16,000)

 

 

Add: Piecemeal recognition of loss

 

 

 

 

  ($16,000/4 years)

 

   4,000

   388,000

 

Consolidated net income

 

 

$1,188,000

 

 

 

 

 

2

Noncontrolling interest expense

 

 

 

 

 

 

 

 

 

Sally’s reported income

 

 

 

 

  $500,000 20%

 

 

$  100,000

 

 

Solution E7-5

 

Prim Corporation and Subsidiary

Consolidated Income Statement

for the year ended December 31, 2014

 

Sales

$1,500,000

Less: Cost of sales

  (870,000)

 

 

      Gross profit

   630,000

Add: Gain on constructive retirement of bondsb

     6,000

Less: Operating expenses

  (250,000)

 

 

      Operating profit

   386,000

Other Items:

 

Bond interest expensea

   (30,000)

      Consolidated net income

$  356,000

 

a  Parent’s bond interest expense $50,000 less interest on bonds held intercompany $20,000 = $30,000.

b  Book value of parent’s bonds purchased $200,000 less purchase price $194,000 = $6,000 gain on constructive retirement.

Solution E7-6

 

1     Constructive loss

 

 

Cost paid to retire 1/2 of Smedley’s bonds

$503,000

 

Book value of bonds retired ($990,000 .5)

 495,000

 

      Constructive loss on bond retirement

$  8,000

 

2     Income from Smedley

 

 

Share of Smedley’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 Smedley

$  5,600

 

 

Solution E7-7

 

1     a

 

January 1, 2006 cost of $200,000 par bonds

$195,500

 

Book value acquired ($1,000,000 + $45,000 premium) 20%

 209,000

 

Constructive gain

$ 13,500

 

2     b

 

Constructive gain $13,500/5 years 4 years

$ 10,800

 

3     c

 

Book value $1,036,000 80% outstanding

$828,800

 

Solution E7-8

 

1a    Constructive gain

 

 

Book value of bonds January 1, 2007

$970,000

 

Amortization for 6 months ($30,000/5 years 1/2 year)

   3,000

 

Book value of bonds July 1, 2007

 973,000

 

Percent purchased by Saydo

      60%

 

 

 

 

Book value of bonds purchased

$583,800

 

Purchase price

 574,800

 

 

 

 

Constructive gain

$  9,000

 

1b    Consolidated bond interest expense for 2007

 

 

Bond interest expense January 1 to July 1

 

 

  ($1,000,000 8% 1/2 year) + $3,000 amortization

$ 43,000

 

 

 

 

Bond interest expense July 1 to December 31

 

 

  [($1,000,000 8% 1/2 year) + $3,000 amortization] 40%

  17,200

 

 

 

 

Consolidated bond interest expense

$ 60,200

 

 


1c    Bond liability of Partie

 

 

 

   Par   

Discount

Book Value

 

January 1, 2007

$1,000,000

$30,000

$970,000

 

Amortization 2007

 

- 6,000

+  6,000

 

December 31, 2007

$1,000,000

$24,000

$976,000

 

      Consolidated bond liability $976,000 40% outstanding  $390,400

 

2     The amounts would not be different if Saydo had been the issuer and Partie the purchaser. However, the constructive retirement gains would ‘belong’ to Saydo and would have been allocated to both Partie and the noncontrolling interests in Saydo.

 

Solution E7-9

 

Subsidiary purchases parent company bonds:

 

1a

Gain on constructive retirement of bonds

 

 

 

 

 

 

 

Book value of Picker’s bonds constructively

 

 

 

  retired ($5,000,000 - $100,000 unamortized

    discount) 40%

 

 

$1,960,000

 

Purchase price of $1,000,000 par bonds

 

 1,900,000

 

Gain on constructive bond retirement

 

$   60,000

 

 

 

 

1b

Consolidated interest payable

 

 

 

 

 

 

 

($3,000,000 + $1,000,000) 10% interest

  1/2 year

 

 

$  200,000

 

 

 

 

1c

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

 

$4,000,000

 

1d    None But Skidden’s investment in Picker bonds will be $1,920,000.

 

 

Cost January 2

$1,900,000

 

 

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

    20,000

 

 

 

$1,920,000

 

 

Parent company purchases subsidiary bonds:

 

 

 

 

 

 

2a

Loss on constructive retirement of bonds

 

 

 

 

 

 

 

Skidden’s bonds payable ($1,000,000 + $20,000)

 

$1,020,000

 

Price paid by Picker

 

 1,030,000

 

Loss on constructive retirement of Skidden’s

  bonds

 

 

$  (10,000)

 

 

 

 

2b

Consolidated interest expense

 

 

 

 

 

 

 

Picker bonds ($5,000,000 10% interest)

  + $20,000 amortization

 

 

$  520,000

 

2c    None Interest receivable of $50,000 is eliminated in consolidation.

 


 



2d

Book value of bonds payable

 

 

 

 

 

 

 

Picker’s bonds December 31, 2006

 

$4,900,000

 

Add: Amortization for 2007 ($100,000/5 years)

 

    20,000

 

 

 

 

 

Book value of bonds payable

 

$4,920,000

 

Solution E7-10

 

1     Gain from constructive retirement of bonds

 

 

Book value of bonds purchased by Shelly

 

 

  ($2,000,000 + $60,000) 25%

$515,000

 

Price paid by Shelly

 490,000

 

 

 

 

Gain from constructive retirement of bonds

$ 25,000

 

2     Working paper entry to eliminate effect of intercompany bond holdings

 

 

12% bonds payable

 512,000

 

 

Interest incomea

  62,000

 

 

Interest payable

  30,000

 

 

      Investment in Perdue bonds

 

 492,000

 

      Gain on retirement of bonds

 

  25,000

 

      Interest expenseb

 

  57,000

 

      Interest receivable

 

  30,000

 

a  ($500,000 12% interest) + $2,000 amortization = $62,000

b  [($2,000,000 12%) - $12,000 amortization] 25% intercompany = $57,000

 

3     Consolidated income statement amounts2007

 

 

a

Constructive gain

      None

 

 

 

 

 

b

Noncontrolling interest expense ($300,000 20%)

$   60,000

 

 

 

 

 

c

Bond interest expense

 

 

 

  [($2,000,000 12%) - $12,000] 75% outsiders

$  171,000

 

 

 

 

 

d

Bond interest income

      None

 

4     Consolidated balance sheet amountsDecember 31, 2007

 

 

a

Investment in Perdue bonds

      None

 

 

 

 

 

b

Book value of bonds payable

 

 

 

  ($2,000,000 + $36,000) 75% outsiders

$1,527,000

 

 

 

 

 

c

Bond interest receivable

      None

 

 

 

 

 

d

Bond interest payable

 

 

 

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

$   90,000

 


Solution E7-11

 

Preliminary computations:

 

Book value of Sandwood bonds on January 1, 2007

$1,000,000

Purchase price paid by Parrish

   783,000

 

 

      Gain on constructive retirement of Sandwood bonds

$  217,000

 

 

      Amortization of discount on bonds ($217,000/7 years)

$   31,000

 

 

Computation of noncontrolling interest expense:

 

 

 

Share of Sandwood’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 expense

$   65,200

 

 

 

Parrish Corporation and Subsidiary

Consolidated Income Statement

for the year ended December 31, 2007

 

Sales

$1,800,000

Less: Cost of sales

   950,000

 

 

      Gross profit

   850,000

Add: Gain from constructive retirement of Sandwood

   217,000

Less: Operating expenses

   400,000

Less: Noncontrolling interest expense

    65,200

 

 

      Consolidated net income

$  601,800

 

Solution E7-12

 

1     Public Corporation and Subsidiary, December 31, 2006

 

 

 

Amounts Appearing

in Consolidated

Financial Statements

 

Interest receivable

      0

 

 

 

 

Investment in Spede bonds

      0

 

 

 

 

Interest payable ($40,000 90%)

 36,000

 

 

 

 

8% bonds payable (($1,000,000 90%)- 13,500 discount)

886,500

 

 

 

 

Interest income

      0

 

 

 

 

Interest expense ($86,000/2) + .9(86,000/2)

 81,700

 

 

 

 

Loss on intercompany bonds

  7,800a

 

 

Solution E7-12 (continued)

 

a  Computation of loss on intercompany bonds

 

Balance of investment in bonds at December 31, 2006

$105,000

 

Add: Amount amortized for July 1 to December 31, 2006

 

 

  ($5,000 balance at December 31 30/36 months = $6,000 unamortized

 

 

    at July 1)

   1,000

 

Investment cost July 1, 2006

$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, 2006

 

 

Interest income

  3,000

 

 

8% bonds payable

 98,500

 

 

Loss on retirement of bonds

  7,800

 

 

            Investment in Spede bonds

 

 105,000

 

            Interest expense

 

   4,300

To eliminate intercompany bonds and record constructive loss on retirement of bonds, and eliminate intercompany interest income and interest expense.

 

 

Interest payable

  4,000

 

 

            Interest receivable

 

   4,000

To eliminate reciprocal interest payable and interest receivable amounts.

 

3     Consolidation working paper entries at December 31, 2007

 

 

Investment in Spede (90%)

  5,850

 

 

Noncontrolling interest

    650

 

 

Interest income

  6,000

 

 

8% bonds payable

 99,100

 

 

            Investment in Spede bonds

 

 103,000

 

            Interest expense

 

   8,600

To eliminate intercompany bonds, interest income and interest expense, and to charge the unrecognized portion of the constructive loss at the beginning of the period 90% to the investment in Spede and 10% to the noncontrolling interest.

 

 

Interest payable

  4,000

 

 

            Interest receivable

 

  4,000

To eliminate reciprocal interest payable and interest receivable amounts.

 


Solution E7-13

 

1

Gain on constructive retirement of bonds

 

 

 

 

 

 

 

Purchase price of bonds

 

$48,800

 

Book value

 

 50,000

 

      Gain on constructive retirement of bonds

 

$ 1,200

 

2     Sonny accounts for its investment in Pappy bonds

 

 

January 1, 2008

 

 

 

      Investment in Pappy bonds

 48,800

 

 

            Cash

 

 48,800

To record investment in $50,000 par, 8% Pappy bonds.

 

 

July 1, 2008

 

 

 

      Cash

  2,000

 

 

      Investment in Pappy bonds

    200

 

 

            Interest income

 

  2,200

To record interest and amortization.

 

 

December 31, 2008

 

 

 

      Interest receivable

  2,000

 

 

      Investment in Pappy bonds

    200

 

 

            Interest income

 

  2,200

To accrue interest and record amortization.

 

3

Pappy accounts for its bonds payable

 

 

 

 

 

 

 

July 1, 2008

 

 

 

      Interest expense

  4,000

 

 

            Cash

 

  4,000

 

      To record interest payable for 6 months.

 

 

 

 

 

 

 

December 31, 2008

 

 

 

      Interest expense

  4,000

 

 

            Interest payable

 

  4,000

 

      To accrue interest for 6 months.

 

 

 

 

 

 

4

Pappy accounts for its investment in Sonny

 

 

 

 

 

 

 

December 31, 2008

 

 

 

      Investment in Sonny

 40,800

 

 

            Income from Sonny

 

 40,800

To record income from Sonny

(80% $50,000) + $1,200 constructive gain - $400 piecemeal recognition of gain.

 

5

Noncontrolling interest expense ($50,000 20%)

 

$ 10,000

 

 

 

 

 

Consolidated net income ($200,000 + $40,800)

 

$240,800

 


SOLUTIONS TO PROBLEMS

 

Solution P7-1

 

1     Loss on constructive retirement of bonds

 

 

Purchase price of $50,000 par bonds

  April 1, 2006

 

 

$53,600

 

Book value of bonds acquired:

 

 

 

      Par value

$100,000

 

 

      Less: Unamortized discount $1,800 for 27

 

 

 

        of 36 months ($1,800 .75)

   2,400

 

 

      Book value of bonds

  97,600

 

 

      Intercompany bonds

      50%

 48,800

 

 

 

 

 

      Loss on constructive retirement of bonds

 

$ 4,800

 

2     Interest income and interest expense

 

 

Interest income in consolidated income statement2006

      0

 

Interest expense in consolidated income statement2006

 

 

  $8,800 - ($8,800 3/4 year 50%)

$ 5,500

 

3     Interest receivable and interest payable

 

 

Interest receivable in consolidated balance sheet

 

 

  at December 31, 2006

      0

 

 

 

 

Interest payable in consolidated balance sheet at

 

 

  December 31, 2006

$ 1,000

 

4     Consolidation working paper entries

 

 

Loss on constructive retirement of bonds

  4,800

 

 

8% bonds payable

 49,100

 

 

Interest income

  2,100

 

 

            Investment in Pongo bonds

 

 52,700

 

            Interest expense

 

  3,300

To eliminate reciprocal interest income and interest expense amounts and reciprocal bond investment and bond liability amounts and enter unrecognized constructive loss.

 

 

Interest payable

  1,000

 

 

            Interest receivable

 

  1,000

To eliminate reciprocal payables and receivables.

 


Solution P7-2

 

Pewter Corporation and Steel Corporation

Schedule to Determine Pewter’s Net Income and Consolidated Net Income

 

 

  2006  

  2007  

  2008  

  2009  

  Total  

Pewter’s separate income

$500,000

$375,000

$460,000

$510,000

$1,845,000

 

 

 

 

 

 

80% of Steel’s net income

+ 80,000

+ 96,000

+ 88,000

+ 96,000

+  360,000

 

 

 

 

 

 

$5,000 unrealized profit in

 

 

 

 

 

  Steel’s December 31, 2006

 

 

 

 

 

    Inventory

-  5,000

+  5,000

 

 

 

 

 

 

 

 

 

$10,000 unrealized profit in

 

 

 

 

 

  Steel’s December 31, 2007

 

 

 

 

 

    Inventory

 

- 10,000

+ 10,000

 

 

 

 

 

 

 

 

$15,000 unrealized profit in

 

 

 

 

 

  2008 on sale of land

 

 

 

 

 

    upstream 80%

 

 

- 12,000

 

-   12,000

 

 

 

 

 

 

$30,000 unrealized profit on

 

 

 

 

 

  sale of equipment in 2008

 

 

- 30,000

 

-   30,000

 

 

 

 

 

 

$7,500 depreciation on

 

 

 

 

 

  unrealized profit on

 

 

 

 

 

    equipment in 2008 and 2009

 

 

+  7,500

+  7,500

+   15,000

 

 

 

 

 

 

$8,000 constructive loss on

 

 

 

 

 

  purchase of Pewter’s bonds

 

 

 

 

 

    in 2009

 

 

 

-  8,000

-    8,000

 

 

 

 

 

 

$2,000 piecemeal recognition of

 

 

 

 

 

  constructive loss in 2009

        

        

        

+  2,000

+    2,000

 

 

 

 

 

 

Pewter’s net income

$575,000

$466,000

$523,500

$607,500

$2,172,000

 

 

Solution P7-3

 

Income from Storm for 2006:

 

Share of reported income of Storm ($200,000 75%)

$ 150,000

Add: Unrealized profit in beginning inventory of Storm

   24,000

Less: Unrealized profit in ending inventory of Storm

  (30,000)

Add: Piecemeal recognition of gain on sale of equipment

 

  to Paar ($48,000/6 years) 75%

    6,000

Less: Unrealized gain on sale of land to Storm

  (20,000)

Less: Unrealized gain on sale of building to Storm less

 

  piecemeal recognition through depreciation ($40,000 - $2,000)

  (38,000)

Add: Gain on constructive retirement of Paar bonds

 

  ($200,000 - $188,000)

   12,000

 

 

      Income from Storm for 2006

$ 104,000

 

 

 

Solution P7-3 (continued)

 

Investment in Storm at December 31, 2006:

 

 

 

Underlying equity in Storm ($1,040,000 75%)

$780,000

Less: Unrealized profit in Storm’s ending inventory

 (30,000)

Less: Unrealized gain on equipment sold to Placid

 

  ($48,000 - $24,000 recognized) 75%

 (18,000)

Less: Unrealized gain on sale of land to Storm

 (20,000)

Less: Unrealized gain on sale of building to

 

      Storm ($40,000 - $2,000 recognized)

 (38,000)

Add: Gain on constructive retirement of Placid’s bonds

  12,000

 

 

      Investment in Storm December 31, 2006

$686,000

 

 

Noncontrolling interest expense:

 

 

 

Net income of Storm

$200,000

Add: Piecemeal recognition of gain on

 

  equipment ($48,000/6 years)

   8,000

Storm’s realized income

 208,000

Noncontrolling interest percentage

      25%

 

 

      Noncontrolling interest expense

$ 52,000

 


Solution P7-3 (continued)

 

Placid Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2006

(in thousands)

 

 

Placid

 

Storm 75%

Adjustments and

Eliminations

Consolidated

Statements

Income Statement

Sales

 

$ 1,260

 

$ 1,000

 

b 100

 

 

$2,160

Gain on land

     20

 

f  20

 

 

Gain on building

     40

 

f  40

 

 

Income from Sahl

    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*

Noncontrolling int. exp.

 

 

k  52

 

    52*

Net income

$  440

$  200

 

 

$  440

 

 

 

 

 

 

Retained Earnings

Retained earningsPlacid

 

$  300

 

 

 

 

$  300

Retained earningsStorm

 

$  200

i 200

 

 

Net income

   440ü

   200ü

 

 

   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

Buildingsnet

   300

   360

 

f  38

   622

Equipmentnet

   280

   180

 

e  24

   436

Investment in Storm stock

   686

 

c  24

i 750

 

 

 

 

e  24

 

 

 

 

 

h  16

 

 

Investment in Placid 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

   420ü

   240ü

 

 

   420

 

$1,740

$1,200

 

 

 

Noncontrolling interest January 1

e   8

i 250

 

Noncontrolling interest December 31

 

k  12

   508

 

 

 

 

 

$1,944


Solution P7-4

 

1

Loss is from the constructive retirement of bonds

 

 

 

 

 

Purchase price of bonds

$106,000

 

Book value of bonds ($100,000 + $3,000 premium)

 103,000

 

 

 

 

      Loss on retirement of bonds

$  3,000

 

 

 

2

Consolidated sales

 

 

 

 

 

Combined sales

$280,000

 

Less: Intercompany sales

  50,000

 

 

 

 

      Consolidated sales

$230,000

 

 

 

3

Consolidated cost of goods sold

 

 

 

 

 

Combined cost of goods sold

$170,000

 

Less: Intercompany sales

 (50,000)

 

Less: Unrealized profits in beginning inventory

 (20,000)

 

Add: Unrealized profits in ending inventory

  10,000

 

 

 

 

      Consolidated cost of goods sold

$110,000

 

 

 

4

Unrealized profit in beginning inventory

 

 

 

 

 

Forced computations ($170,000 + $10,000) - ($50,000 + $110,000)

$ 20,000

 

 

 

5

Unrealized profit in ending inventory

 

 

 

 

 

Combined inventories ($100,000 + $50,000)

$150,000

 

Less: Consolidated inventories

 140,000

 

 

 

 

      Unrealized profit in ending inventory

$ 10,000

 

 

 

6

Consolidated accounts receivable

 

 

 

 

 

Combined accounts receivable ($120,000 + $60,000)

$180,000

 

Less: Intercompany receivables

  15,000

 

 

 

 

      Consolidated accounts receivable

$165,000

 

 

 

7

Noncontrolling interest expense

 

 

 

 

 

Sher’s reported income

$ 30,000

 

Add: Unrealized profit in beginning inventory

  20,000

 

Less: Unrealized profit in ending inventory

 (10,000)

 

Sher’s realized income

  40,000

 

Noncontrolling interest percentage

      20%

 

 

 

 

      Noncontrolling interest expense

$  8,000

 

 


Solution P7-4 (continued)

 

8

Noncontrolling interest December 31, 2008

 

 

 

 

 

Beginning noncontrolling interest ($335,000 20%)

$ 67,000

 

Less: Unrealized profit in beginning inventory

  ($20,000 20%)

 

  (4,000)

 

Less: Noncontrolling interest dividends ($15,000 20%)

  (3,000)

 

Add: Noncontrolling interest expense

   8,000

 

 

 

 

      Noncontrolling interest December 31, 2008

$ 68,000

 

 

 

 

Alternative computation:

 

 

Ending equity of Sher ($350,000 20%)

$ 70,000

 

Less: Unrealized profit in ending inventory ($10,000 20%)

   2,000

 

 

 

 

      Noncontrolling interest December 31, 2009

$ 68,000

 

 

 

9

Investment in Sher stock at December 31, 2007

 

 

 

 

 

Investment in Sher stock at cost

$320,000

 

Add: Changes in retained earnings to December 31, 2007

 

 

  ($135,000 - $100,000) 80%

  28,000

 

Less: Excess of $80,000/8 years = $10,000 per year

  2 years

 

 (20,000)

 

Less: Unrealized profit in beginning inventory

  ($20,000 80%)

 

 (16,000)

 

 

 

 

      Investment in Sher stock December 31, 2007

$312,000

 

 

 

 

Alternative computation:

 

 

Investment in Sher stock December 31, 2008

$320,000

 

Less: Income from Sher for 2008

 (20,000)

 

Add: Dividends from Sher ($15,000 80%)

  12,000

 

 

 

 

      Investment in Sher stock December 31, 2007

$312,000

 

 

 

10

Income from Sher

 

 

 

 

 

Share of Sher’s reported net income ($30,000 80%)

$ 24,000

 

Less: Depreciation on excess ($80,000/8 years)

 (10,000)

 

Add: Unrealized profit in beginning inventory

  ($20,000 80%)

 

  16,000

 

Less: Unrealized profit in ending inventory ($10,000 80%)

  (8,000)

 

Less: Constructive loss on retirement of bonds

  ($3,000 - $1,000)

 

  (2,000)

 

 

 

 

      Peter’s income from Sher

$ 20,000

 

Solution P7-5 [AICPA adapted]

 

1

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

$ 65,000

 

 

 

2

Equipmentnet ($800,000 equipment - $320,000 accumulated

 

 

depreciation - $21,000 unrealized profit + $7,000 profit

 

 

realized through depreciation of excess)

$466,000

 

 

 

3

Investment in Shaw does not appear in consolidated statements.

 

 

 

 

4

Bonds payable (Shaw’s bonds payable of $200,000 1/2 held

 

 

outside the consolidated entity)

$100,000

 

 

 

5

Common stock (Poe’s stock)

$100,000

 

 

 

6

Beginning retained earnings (Poe’s retained earnings)

$272,000

 

 

 

7

Dividends paid (Poe’s dividends)

$ 80,000

 

 

 

8

Gain on retirement of bonds (Book value of Shaw’s

 

 

bonds acquired by Poe $100,000 less acquisition cost

 

 

of $91,000. Since bonds were acquired on December 31,

 

 

2006, 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 (Shaw paid interest for the entire year to

 

 

outside entities so all of Shaw’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 Sahl for 2007:

 

Share of reported income of Sahl ($100,000 75%)

$ 75,000

Add: Unrealized profit in beginning inventory of Sahl

  12,000

Less: Unrealized profit in ending inventory of Sahl

 (15,000)

Add: Piecemeal recognition of gain on sale of equipment

 

  to Paar ($24,000/6 years) 75%

   3,000

Less: Unrealized gain on sale of land to Sahl

 (10,000)

Less: Unrealized gain on sale of building to Sahl less

 

  piecemeal recognition through depreciation ($20,000 - $1,000)

 (19,000)

Add: Gain on constructive retirement of Paar bonds

 

  ($100,000 - $94,000)

   6,000

 

 

      Income from Sahl for 2007

$ 52,000

 

 


Solution P7-6 (continued)

 

Investment in Sahl at December 31, 2007:

 

 

 

Underlying equity in Sahl ($520,000 75%)

$390,000

Less: Unrealized profit in Sahl’s ending inventory

 (15,000)

Less: Unrealized gain on equipment sold to Paar

 

  ($24,000 - $12,000 recognized) 75%

  (9,000)

Less: Unrealized gain on sale of land to Sahl

 (10,000)

Less: Unrealized gain on sale of building to

 

      Sahl ($20,000 - $1,000 recognized)

 (19,000)

Add: Gain on constructive retirement of Paar’s bonds

   6,000

 

 

      Investment in Sahl December 31, 2007

$343,000

 

 

Noncontrolling interest expense:

 

 

 

Net income of Sahl

$100,000

Add: Piecemeal recognition of gain on

 

  equipment ($24,000/6 years)

   4,000

Sahl’s realized income

 104,000

Noncontrolling interest percentage

      25%

 

 

      Noncontrolling interest expense

$ 26,000

 


Solution P7-6 (continued)

 

Paar Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2007

 

 

 

Paar

 

Sahl 75%

Adjustments and

Eliminations

Consolidated

Statements

Income Statement

Sales

 

$  630,000

 

$  500,000

 

b  50,000

 

 

$1,080,000

Gain on plant

    30,000

 

f  30,000

 

 

Income from Sahl

    52,000

 

h  52,000

 

 

Gain on bonds

 

 

 

g   6,000

     6,000

Cost of sales

   350,000*

   300,000*

d  15,000

b  50,000

 

 

 

 

 

c  12,000

   603,000*

Depreciation expense

    76,000*

    40,000*

 

e   4,000

 

 

 

 

 

f   1,000

   111,000*

Interest expense

    20,000*

 

 

 

    20,000*

Operating expense

    46,000*

    60,000*

 

 

   106,000*

Noncontrolling int. exp.

 

 

k  26,000

 

    26,000*

Net income

$  220,000

$  100,000

 

 

$  220,000

 

 

 

 

 

 

Retained Earnings

Retained earningsPaar

 

$  150,000

 

 

 

 

$  150,000

Retained earningsSahl

 

$  100,000

i 100,000

 

 

Net income

   220,000ü

   100,000ü

 

 

   220,000

Dividends

   160,000*

    80,000*

 

h  60,000

 

 

 

 

 

k  20,000

   160,000*

Retained earnings

  December 31

 

$  210,000

 

$  120,000

 

 

 

$  210,000

 

 

 

 

 

 

Balance Sheet

Cash

 

$   27,000

 

$   81,000

 

a  10,000

 

 

$  118,000

Bond interest receivable

 

     5,000

 

j   5,000

 

Other receivables

    40,000

    30,000

 

a  10,000

    60,000

Inventories

    80,000

    50,000

 

d  15,000

   115,000

Land

    90,000

    70,000

 

f  10,000

   150,000

Buildingsnet

   150,000

   180,000

 

f  19,000

   311,000

Equipmentnet

   140,000

    90,000

 

e  12,000

   218,000

Investment in Sahl stock

   343,000

 

c  12,000

i 375,000

 

 

 

 

e  12,000

 

 

 

 

 

h   8,000

 

 

Investment in Paar bonds

 

    94,000

 

g  94,000

 

 

$  870,000

$  600,000

 

 

$  972,000

 

 

 

 

 

 

Accounts payable

$   50,000

$   80,000

 

 

$  130,000

Bond interest payable

    10,000

 

j   5,000

 

     5,000

10% bonds payable

   200,000

 

g 100,000

 

   100,000

Common stock

   400,000

   400,000

i 400,000

 

   400,000

Retained earnings

   210,000ü

   120,000ü

 

 

   210,000

 

$  870,000

$  600,000

 

 

 

 

 

 

 

 

 

Noncontrolling interest January 1

e   4,000

i 125,000

 

Noncontrolling interest December 31

 

k   6,000

   127,000

 

 

 

 

 

$  972,000

*   Deduct





 

 

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