Chap 008

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. here is also a premium or
discount account to be eliminated when the bonds are not issued at par value. !nless
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 #oth 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 reac$uired by the debtor
will be treated as retired. his treatment can lead to incorrect reports for the consolidated
entity in two dimensions. If a company were to repurchase bonds from an affiliate, any
retirement gain or loss reported by the debtor is not a gain or loss to the economic entity and
must be eliminated in preparing consolidated statements. %oreover, although a purchase of
debt of any of the other companies in the consolidated entity will not be recogni&ed as a
retirement by the debtor, when emphasis is placed on the economic entity the purchase must
serve as a basis for recognition of a bond retirement for the consolidated entity.
Q8-6 he difference in treatment is due to the effect of the transactions on the consolidated
entity. In the case of land sold to another affiliate, a gain has been recorded that is not a gain
from the viewpoint of the consolidated entity. hus, it must be eliminated in the consolidation
process. 'n the other hand, in a bond repurchase the buyer simply records an investment in
bonds and the debtor makes no special entries because of the purchase by an affiliate.
(either company records the effect of the transaction on the economic entity. hus, in the
consolidation process an entry must be made to show the gain on bond retirement that has
occurred from the viewpoint of the economic entity.
8-1
Q8-7 When there has been a direct sale to an affiliate, the interest income recorded by the
purchaser should e$ual the interest expense recorded by the seller and the two items should
have no net effect on reported income. he 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. #ecause
the full amount of the loss was recogni&ed 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 he 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
unrecogni&ed gain or loss at the end of the period. o 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. *onsolidated net income will decrease by
the amount of the loss. #ecause 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 e$ual in the direct placement case. When the subsidiary purchases parent
company bonds from a nonaffiliate, interest income and interest expense will not be the
same unless the bonds are purchased from the nonaffiliate at an amount e$ual to the liability
reported by the parent.
8-2
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. *onsolidated
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.
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. *onsolidated 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 'n 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 recogni&ed from a consolidated viewpoint. he difference
between the sale price received by the parent and par value is a premium or discount. +ach
period there will be a need to establish the correct amount for the premium or discount
account and to ad,ust interest expense recorded by the subsidiary to bring the reported
amounts into conformity with the sale price to the nonaffiliate.
Q8-18 he retirement gain or loss reported by the subsidiary when it repurchases the bonds
held by the parent must be eliminated in the consolidation process. -rom 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 recogni&ed at that point.
8-3
SOLUTIONS TO CASES
C8-1 R!"#$%&%"$ "' R&%()$& *+%$, +$- L",,,
a. When -lood purchases the bonds it establishes an investment account on its books and
#radley establishes a bond liability and discount account on its books. (o entry is made by
*entury. When *entury purchases the bonds, *entury records an investment and -lood
removes the balance in the investment account and records a gain on the sale. #radley
makes no entry. When #radley retires the issue, #radley removes its liability and
unamorti&ed discount and records a loss on bond retirement. *entury removes the bond
investment account and records a loss on the sale of bonds. -lood makes no entry.
b. A constructive loss on bond retirement is reported by the consolidated entity at the time
*entury purchases the bonds from -lood. he exact amount of the loss cannot be
ascertained without knowing the maturity date of the bonds, the date of initial sale, and the
date of purchase by *entury.
c. he initial sale of bonds by #radley is treated as a normal transaction with no need for an
ad,ustment to income assigned to the noncontrolling shareholders. Income assigned to
noncontrolling shareholders will be reduced by a proportionate share of the loss reported in
the consolidated income statement in the period in which *entury purchases the bonds from
-lood. In the years before the bonds are retired by #radley, income assigned to the
noncontrolling interest (assuming no differential) will be greater than a pro rata portion of the
reported net income of #radley. In the period in which the bonds are retired by #radley,
reported net income of #radley must be ad,usted to remove its loss on bond retirement
before assigning income to the noncontrolling interest. (o ad,ustment is made in the years
following the repurchase by #radley.
8-4
C8-2 B"((".%$# /0 1+(%+/2 I$&(,& E$&%&%,
%+%'
o. /resident
0ydro *orporation
-rom. , Accounting 1taff
2e. *onsolidation of 3oint 4enture
0ydro *orporation and 2ich *orner #ank established a ,oint venture which borrowed
567,777,777 and built a new production facility. hat facility is now leased to 0ydro on a 87"
year operating lease. 0ydro 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 ,oint venture. I have been asked to review the current financial
reporting standards and determine whether 0ydro9s current reporting is appropriate.
he circumstances surrounding the creation of the ,oint venture and the lease arrangement
with 0ydro appear to point to the need for 0ydro to consolidate the ,oint venture with its own
operations. Although 2ich *orner #ank holds 877 percent of the e$uity of the ,oint venture, it
has contributed less than 8 percent of the total assets of the ,oint venture (5:77,777 of e$uity
versus 567,777,777 of total borrowings). !nder normal circumstances, less than a 87
percent investment in the entity9s total assets is considered insufficient to permit the entity to
finance its activities. ;3ASB INT4 46, /ar <=
In this situation, 0ydro has guaranteed the 567,777,777 borrowed by the ,oint venture and
has guaranteed a :7 percent annual return on the e$uity investment of 2ich *orner #ank.
hese conditions will result in 0ydro *orporation absorbing any losses incurred by the ,oint
venture and establish 0ydro *orporation as the primary beneficiary of the entity. he -A1#
re$uires consolidation by the entity that will absorb a ma,ority of the entity9s expected losses
if they occur. ;3ASB INT4 46, /ar. 8>=
*onsolidation of the ,oint venture will result in including the production facility among 0ydro9s
assets and the debt as part of its long"term liabilities. he claim on the net assets of the ,oint
venture held by 2ich *orner #ank will be reported as part of noncontrolling interest. 0ydro9s
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 ,oint venture.
Primary citation:
-A1# I(. >?
8-5
C+, 8-3 S5/,%-%+(0 B"$- H"2-%$#,
%+%'
o. -inancial 4ice"/resident
-arflung *orporation
-rom. , Accounting 1taff
2e. Investment in #onds Issued by 1ubsidiary
he consolidated financial statements of -arflung *orporation should include both %icro
*ompany and +agle *orporation. he 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, /ar. 8=
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 -arflung9s consolidated statements at @ecember 68, :7A>, the following
eliminating entry should have been included in the workpaper.
+(8) #onds /ayable >77,777
Boss on #ond 2etirement :>,777
Investment in %icro *ompany #onds >:>,777
he 5:>,777 loss should have been included in the consolidated income statement, leading
to a reduction of 58C,?77 (5:>,777 x .?C) in income assigned to the controlling interest and a
reduction of 5D,>77 (5:>,777 x .6C) in income assigned to noncontrolling shareholders. his
error should be corrected by restating the financial statements of the consolidated entity for
:7A>.
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 (8) the bonds had 8C years remaining until maturity when purchased
by +agle and pay D percent interest annually, (:) straight"line amorti&ation of the premium
paid by +agle is appropriate, and (6) the consolidated financial statements as of @ecember
68, :7A>, are corrected, the eliminating entry at @ecember 68, :7AC, is.
8-6
C8-3 (continued)
+(:) #onds /ayable >77,777
Interest Income 67,>77(a)
2etained +arnings 8C,?77
(oncontrolling Interest D,>77
Investment in %icro *ompany #onds >::,>77(b)
Interest +xpense 6:,777(c)
(a) (5>77,777 x .7D) " (5:>,777E8C years)
(b) 5>:>,777 " (5:>,777E8C years)
(c) 5>77,777 x .7D
Primary citation:
A2# C8, /ar. ?
C8-4 I$&(,& I$!") +$- E67$,
a. 1nerd apparently paid more than par value for the bonds and is amorti&ing the premium
against interest income over the life of the bonds. hus, the cash received is greater than the
amount of interest income recorded.
b. With the information given, the following appears to be true.
(8) When purchasing the bonds, 1nerd apparently paid less than the current carrying
amount of the bonds on the subsidiary9s books because a constructive gain on bond
retirement is included in the :7A6 consolidated income statement. 1ince 1nerd paid par
value for the bonds, they must have been sold at a premium by the subsidiary.
(:) #ecause 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.
(6) Interest income recorded each period by 1nerd 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.
8-7
C8-5 I$&(!")7+$0 D/&
Answers to this case can be found in the 1+* -orm 87"F filed by 0ershey -oods and its
annual report.
a. When intercompany loans are made between affiliates in different countries, the problem
of changing currency exchange rates may arise, especially if any of the loans are
denominated in a currency that rapidly changes in value against the dollar. 0ershey -oods
and many other companies in the same situation hedge their intercompany
receivablesEpayables through foreign currency forward contracts and swaps.
b. 0ershey)s intercompany receivablesEpayables appear to come primarily from
intercompany purchases and sales of goods.
8-8
SOLUTIONS TO E8ERCISES
E8-1 B"$- S+2 '(") P+($& &" S5/,%-%+(0
a. 3ournal entries recorded by 0umbolt *orporation.
3anuary 8, :7A:
Investment in Bamar *orporation #onds 8C?,777
*ash 8C?,777
3uly 8, :7A:
*ash >,C77
Interest Income >,:77
Investment in Bamar *orporation #onds 677
@ecember 68, :7A:
Interest 2eceivable >,C77
Interest Income >,:77
Investment in Bamar *orporation #onds 677
b. 3ournal entries recorded by Bamar *orporation.
3anuary 8, :7A:
*ash 8C?,777
#onds /ayable 8C7,777
#ond /remium ?,777
3uly 8, :7A:
Interest +xpense >,:77
#ond /remium 677
*ash >,C77
@ecember 68, :7A:
#ond /remium 677
Interest /ayable >,C77
c. +liminating entries, @ecember 68, :7A:.
+(8) #onds payable 8C7,777
/remium on #onds /ayable C,>77
Interest income D,>77
Investment in Bamar *orporation #onds 8CC,>77
Interest expense D,>77
+liminate intercorporate bond holdings.
+(:) Interest payable >,C77
Interest receivable >,C77
+liminate intercompany receivableEpayable.
8-9
E8-2 C")75&+&%"$ "' T(+$,'( P(%!
a. 587C,777 G 5877,777 par value H (5:C7 x :7 periods) premium
b. 5876,C77 G 587C,777 " (5:C7 x ? periods)
c. +liminating entries.
+(8) #onds /ayable 877,777
#ond /remium 6,C77
Interest Income 88,C77
Investment in (ettle *orporation #onds 876,C77
Interest +xpense 88,C77
+(:) Interest /ayable ?,777
Interest 2eceivable ?,777
E8-3 B"$- S+2 +& D%,!"5$&
a. 58?,D77 G ;(5?77,777 x .7D) H (58:,777 E C years)= x 8E6
b. 3ournal entries recorded by Wood *orporation.
3anuary 8, :7A>
*ash 8?,777
Interest 2eceivable 8?,777
3uly 8, :7A>
*ash 8?,777
Investment in *arter *ompany #onds D77
Interest Income 8?,D77
5D77 G (5>77,777 " 56<:,777)E(C x :)
@ecember 68, :7A>
Investment in *arter *ompany #onds D77
Interest Income 8?,D77
c. +liminating entries, @ecember 68, :7A>.
+(8) #onds /ayable >77,777
Interest Income 66,?77
Investment in *arter *ompany #onds 6<C,:77
#ond @iscount >,D77
Interest +xpense 66,?77
566,?77 G 58?,777 H 58?,777 H 5D77 H 5D77
56<C,:77 G 56<:,777 H (5D77 x >)
5>,D77 G 5D,777 " (5D77 x >)
+(:) Interest /ayable 8?,777
8-10
E8-4 E9+25+&%"$ "' I$&(!"(7"(+& B"$- H"2-%$#,
a. he bonds were originally sold at a discount. 1tellar purchased the bonds at par value
and a constructive loss was reported.
b. he annual interest payment received by 1tellar will be less than the interest expense
recorded by the subsidiary. When bonds are sold at a discount, the issue price of the
bonds is ad,usted downward because the annual interest payment is less than is
needed to issue the bonds at par value.
c. In :7A?, consolidated net income was decreased as a result of the loss on constructive
retirement of bonds. +ach period following the purchase, the amount of interest expense
recorded by the subsidiary will exceed the interest income recorded by the parent.
When these two amounts are eliminated, consolidated net income will be increased.
hus, consolidated net income for :7AI will be increased.
E8-5 M52&%72-C:"%! Q5,&%"$,
8. a A constructive gain of 5877,777 is included in consolidated net income for the period
ended %arch 68, :7AD, and consolidated retained earnings at %arch 68, :7AD.
#ecause the bonds of the parent are constructively retired, there is no effect on the
amounts assigned to the noncontrolling interest. ;AI*/A Adapted=
:. a he loss on bond retirement will result in a reduction in consolidated retained
earnings. ;AI*/A Adapted=
6. b 5>,I77 G (5C7,777 x .87) " (56,777 E 87 years)
>. a 5>,777 G (5C7,777 x .87) " (5D,777 E D years)
C. c 5C,?77 loss G 5CD,777 purchase price
" ;5C6,777 " (56,777 E 87 years) x : years=
?. c 'perating income of Fruse *orporation 5>7,777
(et income of Jary)s Ice *ream /arlors :7,777
5?7,777
Bess. Boss on bond retirement (C,?77)
2ecognition during :7A?
(5>,I77 " 5>,777) I77
*onsolidated net income 5CC,877
8-11
E8-6 M52&%72-C:"%! Q5,&%"$,
8. a 58>,777 G ;(5677,777 x .7<) " (5?7,777 E 87 years)=
x (5:77,777 E 5677,777)
:. c 58:,777 G ;58:7,777 " (5:7,777 E 87 years) x : years= " 587>,777
6. b (et income of 1olar *orporation 567,777
!nrecogni&ed portion of gain
on bond retirement (58:,777 " 58,C77) 87,C77
5>7,C77
/roportion of stock held by
noncontrolling interest x .:7
Income to noncontrolling interest 5 D,877
E8-7 C"$,&(5!&%9 R&%()$& +& E$- "' Y+(
a. +liminating entries, @ecember 68, :7AC.
+(8) #onds /ayable >77,777
/remium on #onds /ayable <,777
Investment in Able *ompany #onds 6<I,777
Jain on #ond 2etirement 8:,777
5<,777 G ;(5>77,777 x 8.76) " 5>77,777= x 8CE:7
58:,777 G 5<,777 H 5>77,777 " 56<I,777
+(:) Interest /ayable 8D,777
Interest 2eceivable 8D,777
b. +liminating entries, @ecember 68, :7A?.
+(8) #onds /ayable >77,777
/remium on #onds /ayable D,>77
Interest Income 6?,:77
Investment in Able *ompany #onds 6<I,:77
Interest +xpense 6C,>77
2etained +arnings, 3anuary 8 I,:77
(oncontrolling Interests >,D77
5D,>77 G 5<,777 " ;5<,777 E (8C x :)= x :
56?,:77 G 56?,777 H ;56,777 E (8C x :)= x :
56<I,:77 G 56<I,777 H (5877 x :)
56C,>77 G 56?,777 " (5677 x :)
5I,:77 G 58:,777 x .?7
5>,D77 G 58:,777 x .>7

8-12
E8-8 C"$,&(5!&%9 R&%()$& +& B#%$$%$# "' Y+(
a. +liminating entries, @ecember 68, :7AC.
+(8) #onds /ayable >77,777
/remium on #onds /ayable <,777
Investment in Able *ompany #onds 6<I,777
Jain on #ond 2etirement 8:,D77
5<,777 G ;(5>77,777 x 8.76) " 5>77,777= x 8CE:7
56?,:77 G 56?,777 H
;(5>77,777 " 56<?,D77)E(8? x :)= x :
56<I,777 G 56<?,D77 H (5877 x :)
56C,>77 G 56?,777 " (5677 x :)
58:,D77 G ;(5>77,777 x 8.76) " 5>77,777=
x 8?E:7 H (5>77,777 " 56<?,D77)
b. +liminating entries, @ecember 68, :7A?.
+(8) #onds /ayable >77,777
/remium on #onds /ayable D,>77
Investment in Able *ompany #onds 6<I,:77
2etained +arnings, 3anuary 8 I,:77
(oncontrolling Interests >,D77
8-13
E8-9 R&%()$& "' B"$-, S"2- +& + D%,!"5$&
+limination of bond investment at @ecember 68, :7AD.
#onds /ayable 677,777
Interest Income :8,:>7
Boss on *onstructive #ond 2etirement :,I67
Investment in -arley *orporation #onds :<I,8:7
Interest +xpense :8,>C7
@iscount on #onds /ayable C,>77
5:8,:>7 G 5:8,777 H ;(5677,777 " 5:<?,DD7) E 86 years=
5:,I67 G 5:<?,DD7 " 5:<>,8C7 (computed below)
5:<I,8:7 G 5:<?,DD7 H ;(5677,777 " 5:<?,DD7) E 86 years=
5:8,>C7 G 5:8,777 H (5<,777 E :7 years)
5C,>77 G (5<,777 E :7 years) x 8: years
*omputation of book value of liability at constructive retirement
1ale price of bonds (5677,777 x .<I) 5:<8,777
Amorti&ation of discount
;(5677,777 " 5:<8,7777) E :7 years= x I years 6,8C7
#ook value of liability at 3anuary 8, :7AD 5:<>,8C7
E8-10 L",, "$ C"$,&(5!&%9 R&%()$&
+liminating entries, @ecember 68, :7AD.
+(8) #onds /ayable 877,777
Interest Income D,777
Boss on #ond 2etirement 8:,777
Investment in Apple *orporation #onds 87?,777
@iscount on #onds /ayable 6,777
Interest +xpense 88,777
+(:) Interest /ayable C,777
Interest 2eceivable C,777

8-14
E8-11 D&()%$%$# &: A)"5$& "' R&%()$& *+%$ "( L",,
a. /ar value of bonds outstanding 5:77,777
Annual interest rate x .8:
Interest payment 5 :>,777
Amorti&ation of bond premium
(58C,777 x : bonds) E C years (?,777)
Interest charge for full year 5 8D,777
Bess. Interest on bond purchased by 'nline +nterprises
;(58D,777 x 8E:) x (> months E 8: months)= (6,777)
Interest expense included in consolidated
income statement 5 8C,777
b. 1ale price of bonds, 3anuary 8, :7A8 588C,777
Amorti&ation of premium ;(58C,777 E C) x : :E6 years= (D,777)
#ook value at time of purchase 587I,777
/urchase price (877,777)
Jain on bond retirement 5 I,777
c. +liminating entries, @ecember 68, :7A6.
+(8) #onds /ayable 877,777
#ond /remium ?,777
Interest Income >,777
Investment in @ownlink #onds 877,777
Interest +xpense 6,777
Jain on #ond 2etirement I,777
8-15
E8-12 E9+25+&%"$ "' B"$- R&%()$&
a. (o gain or loss will be reported by #undle.
b. A gain of 586,777 will be reported.
#ook value of liability reported by #undle.
/ar value of bonds outstanding 5:77,777
!namorti&ed premium
5D,777 " ;(5D,777 E 87 years) x 6.C years= C,:77
#ook value of debt 5:7C,:77
Amount paid by /arent (8<:,:77)
Jain on bond retirement 5 86,777
c. *onsolidated net income for :7A? will increase by 58:,777.
Jain on bond retirement 5 86,777
Ad,ustment for excess of interest income
over interest expense.
Interest income 5(88,?77)
Interest expense 87,?77 (8,777)
Increase in consolidated net income 5 8:,777
d. +liminating entries, @ecember 68, :7A?.
+(8) #onds /ayable :77,777
/remium on #onds /ayable >,D77
Investment in #undle *ompany #onds 8<:,D77
Interest +xpense 87,?77
Jain on #ond 2etirement 86,777
5>,D77 G (5D,777 E 87 years) x ? years
588,?77 G ;5::,777 H (5I,D77 E ?.C years)= E :
58<:,D77 G 58<:,:77 H ;(5I,D77 E ?.C years) E :=
587,?77 G (5::,777 " 5D77) E :
+(:) Interest /ayable 88,777
Interest 2eceivable 88,777
8-16
E8-12 (continued)
e. +liminating entries, @ecember 68, :7AI.
+(8) #onds /ayable :77,777
/remium on #onds /ayable >,777
Interest Income :6,:77
Investment in #undle *ompany #onds 8<>,777
Interest +xpense :8,:77
2etained +arnings, 3anuary 8 D,>77
(oncontrolling Interest 6,?77
5>,777 G (5D,777 E 87 years) x C years
5:6,:77 G 5::,777 H (5I,D77 E ?.C years)
58<>,777 G 58<:,D77 H (5I,D77 E ?.C years)
5:8,:77 G 5::,777 " (5D,777 E 87 years)
5D,>77 G (586,777 " 58,777) x .I7
56,?77 G (586,777 " 58,777) x .67
+(:) Interest /ayable 88,777
Interest 2eceivable 88,777
f. Income assigned to noncontrolling interest in :7AI is 58>,>77.
(et income reported by #undle 5 C7,777
Interest income 5(:6,:77)
Interest expense :8,:77 (:,777)
2eali&ed net income 5 >D,777
/roportion of ownership held x .67
Income assigned to noncontrolling interest 5 8>,>77
8-17
E8-13 E2%)%$+&%"$ "' I$&(!"(7"(+& B"$- H"2-%$#,
a. +liminating entries, @ecember 68, :7AD.
+(8) #onds /ayable 877,777
/remium on #onds /ayable 6,777
Interest Income 88,677
*onstructive Boss on #ond 2etirement 8,>77
Investment in 1tang *orporation #onds 87>,:77
56,777 G 5C,777 " (5C77 x > years)
588,677 G 58:,777 " (5>,<77 E I years)
58,>77 G 587>,<77 " (587C,777 " 58,C77)
587>,:77 G 587>,<77 " (5>,<77 E I years)
588,C77 G 58:,777 " (5C,777 E 87 years)
b. Income assigned to noncontrolling interest in :7AD is 5?,CD7.
(et income reported by 1tang *orporation 5 :7,777
*onstructive loss on bond retirement (8,>77)
Ad,ustment for excess of interest expense
over interest income.
Interest expense 588,C77
Interest income (88,677) :77
2eali&ed net income 5 8D,D77
/roportion of ownership held x .6C
Income assigned to noncontrolling interest 5 ?,CD7
c. +liminating entries, @ecember 68, :7A<.
+(8) #onds /ayable 877,777
/remium on #onds /ayable :,C77
Interest Income 88,677
2etained +arnings, 3anuary 8 ID7
(oncontrolling Interest >:7
Investment in 1tang *orporation #onds 876,C77
5:,C77 G 56,777 " 5C77
588,677 G 58:,777 " (5>,<77 E I years)
5ID7 G (58,>77 " 5:77) x .?C
5>:7 G (58,>77 " 5:77) x .6C
5876,C77 G 587>,:77 " 5I77
588,C77 G 58:,777 " (5C,777 E 87 years)
8-18
SOLUTIONS TO PROBLEMS
P8-14 C"$,"2%-+&%"$ W"(;7+7( .%&: S+2 "' B"$-, &" S5/,%-%+(0
a. +ntries recorded by /orter on its investment in emple.
*ash ?,777
Investment in emple *orporation 1tock ?,777
2ecord dividends from emple.
587,777 x .?7
Investment in emple *orporation 1tock 8D,777
Income from 1ubsidiary 8D,777
2ecord e$uity"method income.
567,777 x .?7
b. +ntry recorded by /orter on its bonds payable.
Interest +xpense ?,777
#ond /remium >77
*ash ?,>77
2ecord interest payment.
5>77 G (5D:,777 " 5D7,777) E C years
c. +ntry recorded by emple on bond investment.
*ash ?,>77
Interest Income ?,777
Investment in /orter *ompany #onds >77
8-19
P8-14 (continued)
d. +liminating entries, @ecember 68, :7A:.
+(8) Income from 1ubsidiary 8D,777
@ividends @eclared ?,777
Investment in emple *orporation 1tock 8:,777
+liminate income from subsidiary.
+(:) Income to (oncontrolling Interest 8:,777
@ividends @eclared >,777
(oncontrolling Interest D,777
Assign income to noncontrolling interest.
58:,777 G 567,777 x .>7
+(6) *ommon 1tock K emple *orporation 877,777
2etained +arnings, 3anuary 8 C7,777
Investment in emple *orporation 1tock <7,777
(oncontrolling Interest ?7,777
+liminate beginning investment balance.
5<7,777 G 587:,777 " 58:,777
5?7,777 G (5877,777 H 5C7,777) x .>7
+(>) #onds payable D7,777
/remium on #onds /ayable 8,:77
Interest income ?,777
Investment in /orter *ompany #onds D8,:77
Interest expense ?,777
58,:77 G (5D:,777 " 5D7,777) x 6EC
5D8,:77 G (5D:,777 " 5D77)
8-20
P8-14 (continued)
e. /orter *ompany and emple *orporation
*onsolidation Workpaper
@ecember 68, :7A:
/orter emple +liminations *onsol"
Item *o. *orp. @ebit *redit idated
1ales :77,777 88>,777 68>,777
Interest Income ?,777 (>) ?,777
Income from 1ubsidiary 8D,777 (8) 8D,777
*redits :8D,777 8:7,777 68>,777
*ost of Joods 1old <<,D77 ?8,777 8?7,D77
@epreciation +xpense :C,777 8C,777 >7,777
Interest +xpense ?,777 8>,777 (>) ?,777 8>,777
@ebits (867,D77) (<7,777) (:8>,D77)
*onsolidated (et Income <<,:77
Income to (oncon"
trolling Interest (:) 8:,777 (8:,777)
Income, carry forward DI,:77 67,777 6?,777 ?,777 DI,:77
2etained +arnings, 3an. 8 :67,777 C7,777 (6) C7,777 :67,777
Income, from above DI,:77 67,777 6?,777 ?,777 DI,:77
68I,:77 D7,777 68I,:77
@ividends @eclared (>7,777) (87,777) (8) ?,777
(:) >,777 (>7,777)
2etained +arnings, @ec. 68,
carry forward :II,:77 I7,777 D?,777 8?,777 :II,:77
*ash and Accounts
2eceivable D7,:77 >7,777 8:7,:77
Inventory 8:7,777 ?C,777 8DC,777
#uildings and +$uipment C77,777 677,777 D77,777
Investment in emple
*orporation 1tock 87:,777 (8) 8:,777
(6) <7,777
Investment in /orter
*ompany #onds D8,:77 (>) D8,:77
@ebits D7:,:77 >D?,:77 8,87C,:77
Accum. @epreciation 8IC,777 IC,777 :C7,777
Accounts /ayable ?D,D77 >8,:77 887,777
#onds /ayable D7,777 :77,777 (>) D7,777 :77,777
#ond /remium 8,:77 (>) 8,:77
*ommon 1tock
/orter *ompany :77,777 :77,777
emple *orporation 877,777 (6)877,777
2etained +arnings,
from above :II,:77 I7,777 D?,777 8?,777 :II,:77
(oncontrolling
Interest (:) D,777
(6) ?7 777 ?D,777
*redits D7:,:77 >D?,:77 :?I,:77 :?I,:77 8,87C,:77
8-21
P8-15 C"$,"2%-+&%"$ W"(;7+7( .%&: S+2 "' B"$-, &" P+($&
a. +ntries recorded by %ega *orporation on its investment in arp *ompany.
*ash 8D,777
Investment in arp *ompany 1tock 8D,777
2ecord dividends from emple.
5:7,777 x .<7
Investment in arp *ompany 1tock ::,C77
Income from 1ubsidiary ::,C77
5:C,777 x .<7
b. +ntry recorded by %ega *orporation on its investment in arp *ompany bonds.
*ash ?,777
Interest Income C,:77
Investment in arp *ompany #onds D77
5D77 G (587>,777 " 5877,777) E C years
c. +ntry recorded by arp *ompany on its bonds payable.
Interest +xpense C,:77
#ond /remium D77
*ash ?,777
8-22
P8-15 (continued)
d. +liminating entries, @ecember 68, :7A>.
+(8) Income from 1ubsidiary ::,C77
@ividends @eclared 8D,777
Investment in arp *ompany 1tock >,C77
+(:) Income to (oncontrolling Interest :,C77
@ividends @eclared :,777
(oncontrolling Interest C77
5:,C77 G 5:C,777 x .87
+(6) *ommon 1tock K arp *ompany D7,777
Investment in arp *ompany 1tock 88I,777
(oncontrolling Interest 86,777
588I,777 G 58:8,C77 " 5>,C77
586,777 G (5D7,777 H 5C7,777) x .87
+(>) #onds /ayable 877,777
/remium on #onds /ayable 8,?77
Interest Income C,:77
Investment in arp *ompany #onds 878,?77
Interest +xpense C,:77
58,?77 G 5>,777 x :EC
5878,?77 G 587>,777 " (5>,777 x 6EC)
8-23
P8-15 (continued)
e. %ega *orporation and arp *ompany
@ecember 68, :7A>
%ega arp +liminations *onsol"
Item *orp. *o. @ebit *redit idated
1ales 8>7,777 8:C,777 :?C,777
Interest Income C,:77 (>) C,:77
Income from 1ubsidiary ::,C77 (8) ::,C77
*redits 8?I,I77 8:C,777 :?C,777
*ost of Joods 1old D?,777 I<,D77 8?C,D77
@epreciation +xpense :7,777 8C,777 6C,777
Interest +xpense 8?,777 C,:77 (>) C,:77 8?,777
@ebits (8::,777) (877,777) (:8?,D77)
*onsolidated (et Income >D,:77
Income to (oncon"
trolling Interest (:) :,C77 (:,C77)
Income, carry forward >C,I77 :C,777 67,:77 C,:77 >C,I77
2etained +arnings, 3an. 8 :>:,777 C7,777 (6) C7,777 :>:,777
Income, from above >C,I77 :C,777 67,:77 C,:77 >C,I77
:DI,I77 IC,777 :DI,I77
@ividends @eclared (67,777) (:7,777) (8) 8D,777
(:) :,777 (67,777)
2etained +arnings, @ec. 68,
carry forward :CI,I77 CC,777 D7,:77 :C,:77 :CI,I77
*ash and 2eceivables ::,777 6?,?77 CD,?77
Inventory 8?C,777 IC,777 :>7,777
#uildings and +$uipment >77,777 :>7,777 ?>7,777
Investment in arp
*ompany 1tock 8:8,C77 (8) >,C77
(6)88I,777
Investment in arp
*ompany #onds 878,?77 (>)878,?77
@ebits D87,877 6C8,?77 <6D,?77
Accum. @epreciation 8>7,777 D7,777 ::7,777
*urrent /ayables <:,>77 6C,777 8:I,>77
#onds /ayable :77,777 877,777 (>)877,777 :77,777
#ond /remium 8,?77 (>) 8,?77
*ommon 1tock
%ega *orporation 8:7,777 8:7,777
arp *ompany D7,777 (6) D7,777
2etained +arnings,
from above :CI,I77 CC,777 D7,:77 :C,:77 :CI,I77
(oncontrolling
Interest (:) C77
(6) 86,777 86,C77
*redits D87,877 6C8,?77 :?8,D77 :?8,D77 <6D,?77
8-24
P8-16 D%(!& S+2 "' B"$-, &" P+($&
a. 3ournal entries recorded by -ern *orporation.
3anuary 8, :7A6
*ash :,777
Interest 2eceivable :,777
2eceive interest on bond investment.
3uly 8, :7A6
*ash :,777
Investment in 4incent *ompany #onds :C7
Interest Income :,:C7
2ecord receipt of bond interest.
5:C7 G 5C,777 E (87 years x :)
@ecember 68, :7A6
*ash I,777
Investment in 4incent *ompany 1tock I,777
2ecord dividends for 4incent.
5I,777 G 587,777 x .I7
Interest 2eceivable (*urrent 2eceivables) :,777
Investment in 4incent *ompany #onds :C7
Interest Income :,:C7
Accrue interest income at year"end.
Investment in 4incent *ompany 1tock :8,777
Income from 1ubsidiary :8,777
5:8,777 G 567,777 x .I7
Income from 1ubsidiary :,D77
Investment in 4incent *ompany 1tock :,D77
2ecord amorti&ation of differential.
5:,D77 G (5C?,777 E 8> years) x .I7
b. 3ournal entries recorded by 4incent *ompany.
3anuary 8, :7A6
Interest /ayable >,777
*ash >,777
5>,777 G 5877,777 x (.7D E :)
3uly 8, :7A6
Interest +xpense >,C77
@iscount on #onds /ayable C77
*ash >,777
1emiannual payment of interest.
5C77 G 587,777 E :7 semiannual payments
8-25
P8-16 (continued)
@ecember 68, :7A6
Interest /ayable (*urrent Biabilities) >,777
Accrue interest expense at year"end.
c. +limination entries, @ecember 68, :7A6.
+(8) Income from 1ubsidiary 8D,:77
@ividends @eclared I,777
Investment in 4incent *ompany 1tock 88,:77
+(:) Income to (oncontrolling Interest I,D77
@ividends @eclared 6,777
(oncontrolling Interest >,D77
5I,D77 G ;567,777 L (5C?,777 E 8> years)= x .67
+(6) *ommon 1tock K 4incent *ompany C7,777
2etained +arnings, 3anuary 8 877,777
@ifferential >D,777
Investment in 4incent *ompany 1tock 86D,?77
(oncontrolling Interest C<,>77
5>D,777 G 5C?,777 " (5>,777 x : years)
586D,?77 G .I7(5C7,777 H 5877,777 H 5>D,777)
5C<,>77 G .67(5C7,777 H 5877,777 H 5>D,777)
+(>) Band, #uildings and +$uipment (net) >>,777
'perating +xpenses >,777
@ifferential >D,777
Assign differential and record amorti&ation.
5>>,777 G 5C?,777 L (5>,777 x 6 years)
+(C) #onds /ayable C7,777
Interest Income >,C77
Investment in 4incent *ompany #onds >?,C77
@iscount on #onds /ayable 6,C77
5>?,C77 G 5>C,777 H (5:C7 x ? periods)
56,C77 G 5I,777 E :
+(?) Interest /ayable (*urrent Biabilities) :,777
Interest 2eceivable (*urrent 2eceivables) :,777
+(I) 2etained +arnings, 3anuary 8 C,?77
(oncontrolling Interest :,>77
Band, #uildings and +$uipment (net) D,777
+liminate profit on intercompany sale of land.
8-26
P8-16 (continued)
d. -ern *orporation and 4incent *ompany
@ecember 68, :7A6
-ern 4incent +liminations *onsol"
Item *orp. *ompany @ebit *redit idated
1ales 677,777 :77,777 C77,777
Interest Income >,C77 (C) >,C77
Income from 1ubsidiary 8D,:77 (8) 8D,:77
*redits 6::,I77 :77,777 C77,777
'perating +xpenses 8<D,C77 8?8,777 (>) >,777 6?6,C77
Interest +xpense :I,777 <,777 (C) >,C77 68,C77
@ebits (::C,C77) (8I7,777) (6<C,777)
*onsolidated (et Income 87C,777
Income to (oncon"
trolling Interest (:) I,D77 (I,D77)
Income, carry forward <I,:77 67,777 6>,C77 >,C77 <I,:77
2etained +arnings, 3an. 8 :>>,>77 877,777 (6)877,777
(I) C,?77 :6D,D77
Income, from above <I,:77 67,777 6>,C77 >,C77 <I,:77
6>8,?77 867,777 66?,777
@ividends @eclared (?7,777) (87,777) (8) I,777
(:) 6,777 (?7,777)
2et. +arnings, @ec. 68,
carry forward :D8,?77 8:7,777 8>7,877 8>,C77 :I?,777
*ash and *urrent
2eceivables 67,677 >?,777 (?) :,777 I>,677
Inventory 8I7,777 I7,777 :>7,777
Band, #uildings and
+$uipment (net) 6:7,777 8D7,777 (>) >>,777 (I) D,777 C6?,777
@iscount on #onds
/ayable I,777 (C) 6,C77 6,C77
Investment in 4incent
*ompany #onds >?,C77 (C) >?,C77
Investment in 4incent
*ompany 1tock 8><,D77 (8) 88,:77
(6)86D,?77
@ifferential (6) >D,777 (>) >D,777
@ebits I8?,?77 676,777 DC6,D77
*urrent Biabilities 6C,777 66,777 (?) :,777 ??,777
#onds /ayable 677,777 877,777 (C) C7,777 6C7,777
*ommon 1tock 877,777 C7,777 (6) C7,777 877,777
2etained +arnings,
from above :D8,?77 8:7,777 8>7,877 8>,C77 :I?,777
(oncontrolling Interest (I) :,>77 (:) >,D77
(6) C<,>77 ?8,D77
*redits I8?,?77 676,777 66?,C77 66?,C77 DC6,D77
8-27
P8-17 I$'"()+&%"$ P("9%-- %$ E2%)%$+&%$# E$&(0
a. 2upp *orporation is the parent company. In the eliminating entry, noncontrolling
interest is credited with a portion of the constructive gain on bond retirement.
b. 2upp holds IC percent ownership of Jross ;5>,:77 E (5>,:77 H 58,>77)=.
c. Amount paid to ac$uire bonds.
Investment in Jross bonds, @ecember 68, :7AI 58<D,:77
Amorti&ation of discount following purchase
;(5:77,777 " 58<D,:77) E 6 years= x :.C years (8,C77)
/urchase price paid by 2upp 58<?,I77
d. A gain of 5I,I77 was reported.
#ook value of liability reported by Jross.
!namorti&ed premium
5D,777 " ;(5D,777 E 87 years) x >.C years= >,>77
#ook value of debt 5:7>,>77
/urchase price paid by 2upp (8<?,I77)
Jain on bond retirement 5 I,I77
e. *onsolidated net income for :7AI after ad,ustment for bond retirement.
Amount reported without ad,ustment 5 I7,777
Interest income 5(8D,?77)
Income expense 8I,:77
(8,>77)
*onsolidated net income 5 ?D,?77
f. Income assigned to the noncontrolling interest will decrease by 56C7
(58,>77 x .:C) as a result of the eliminating entry.
g. +liminating entry prepared at @ecember 68, :7AD.
#onds /ayable :77,777
/remium on #onds /ayable 8,?77
Interest Income 8D,?77
Investment in Jross *orporation #onds 8<D,D77
Interest +xpense 8I,:77
2etained +arnings, 3anuary 8 6,8C7
(oncontrolling Interest 8,7C7
+liminate intercompany bond holdings.
58,?77 G (5:,>77 E 6 years) x : years
58D,?77 G (5:77,777 x .7<) H (58,D77 E 6 years)
58<D,D77 G 58<D,:77 H (58,D77 E 6 years)
58I,:77 G (5:77,777 x .7<) " (5:,>77 E 6 years)
56,8C7 G ;5I,I77 " (58,>77 x :.C years)= x .IC
58,7C7 G ;5I,I77 " (58,>77 x :.C years)= x .:C
8-28
P8-18 P(%"( R&%()$& "' B"$-,
a. Amount paid by Ama&ing *orporation for bonds.
2eported balance, @ecember 68, :7A? 587:,>77
Amorti&ation of premium during :7A?
(5:,>77 E ? years) >77
/urchase price 587:,D77
b. Interest +xpense <,C77
*ash <,777
Annual payment of interest.
5<,C77 G ;5<,777 H (56,777 E ? years)=
c. *ash <,777
Investment in #roadway *ompany #onds >77
Interest Income D,?77
Annual receipt of interest.
5D,?77 G ;5<,777 " (5:,>77 E ? years)=
d. #onds /ayable 877,777
Boss on #ond 2etirement ?,677
Investment in #roadway *ompany #onds 87:,D77
@iscount on #onds /ayable 6,C77
5?,677 G 587:,D77 " ;5<I,777 "
(56,777 E ? years)=
587:,D77 G computed above
56,C77 G ;56,777 H (56,777 E ? years)=
e. *onsolidated net Income and income to controlling
interest for :7AC and :7A?.
:7AC :7A?
'perating income reported by Ama&ing 58:7,777 58C7,777
(et income reported by #roadway ?7,777 D7,777
Boss on bond retirement (?,677)
(5<,C77) over interest income (5D,?77) <77
*onsolidated net income 58I6,I77 5:67,<77
Income to noncontrolling interest.
(5?7,777 " 5?,677) x .8C (D,7CC)
(5D7,777 H 5<77) x .8C (8:,86C)
Income to controlling interest 58?C,?>C 5:8D,I?C
8-29
P8-19 I$!")72& D+&+
a. /urchase price of bonds.
#alance reported in bond investment account in
excess of par value, @ecember 68, :7A>
(587<,777 " 5877,777) 5 <,777
Amount amorti&ed per year (5<,777 E ? years) 8,C77
/remium at date of purchase 5 87,C77
/ar value 877,777
/urchase price 5887,C77
b. *arrying amount of liability on date of purchase.
#ond premium, @ecember 68, :7A> 5 ?,777
Amount amorti&ed per year (5?,777 E ? years) 8,777
#ond premium, 3anuary 8, :7A> 5 I,777
/ar value 877,777
*arrying amount of liability, 3anuary 8, :7A> 587I,777
c. Income to noncontrolling interest in :7AC.
2eported net income of *ondor *ompany 5 67,777
over interest income recorded in :7AC C77
5 67,C77
/roportion of stock held by noncontrolling interest x .67
Income assigned to noncontrolling interest 5 <,8C7
+xcess of interest expense over interest income
Interest expense.
(5877,777 x .8:) " (587,777 E 87) 588,777
Interest income.
(5877,777 x .8:) L (587,C77 E I) (87,C77)
+xcess 5 C77
8-30
P8-20 B+2+$! S:& E2%)%$+&%"$,
a. +liminating entries, @ecember 68, :7A>.
+(8) *ommon 1tock K 1tang #rewing *ompany 877,777
2etained +arnings 8I7,777
Investment in 1tang #rewing 1tock :8?,777
(oncontrolling Interest C>,777
+liminate balance in investment account.
+(:) 2etained +arnings 8:,777
Inventory 8:,777
+liminate unreali&ed inventory profit
on downstream sale.
58:,777 G 5>:,777 " (5>:,777 E 8.>7)
+(6) 2etained +arnings >,D77
(oncontrolling Interest 8,:77
Inventory ?,777
+liminate unreali&ed inventory profit
on upstream sale.
5?,777 G 5:?,777 " (5:?,777 E 8.67)
+(>) #onds /ayable 877,777
#ond /remium 8:,777
Investment in 1tang #rewing #onds 878,C77
2etained +arnings D,>77
(oncontrolling Interest :,877
!nrecogni&ed portion of gain at @ecember 68, :7A>.
#ond liability (5677,777 H 56?,777) E 6 588:,777
#ond investment (878,C77)
!nrecogni&ed portion of gain 5 87,C77
#ath *orporation x .D7
Jain assigned to #ath *orporation 5 D,>77
Jain assigned to noncontrolling
interest (87,C77 x .:7) 5 :,877
+(C) Interest /ayable (Accounts /ayable) >,777
Interest 2eceivable (*ash and
2eceivables) >,777
8-31
P8-20 (continued)
b. #ath *orporation and 1tang #rewing *ompany
*onsolidated #alance 1heet Workpaper
@ecember 68, :7A>
1tang
#ath #rewing +liminations *onsol"
*ash and 2eceivables 8::,C77 8:>,777 (C) >,777 :>:,C77
Inventory :77,777 8C7,777 (:) 8:,777
(6) ?,777 66:,777
#uildings and +$uipment
(net) 6:7,777 6?7,777 ?D7,777
Investment in.
1tang #rewing #onds 878,C77 (>)878,C77
1tang #rewing 1tock :8?,777 (8):8?,777
otal @ebits <?7,777 ?6>,777 8,:C>,C77
Accounts /ayable >7,777 :D,777 (C) >,777 ?>,777
#onds /ayable >77,777 677,777 (>)877,777 ?77,777
#ond /remium 6?,777 (>) 8:,777 :>,777
*ommon 1tock :77,777 877,777 (8)877,777 :77,777
2etained +arnings 6:7,777 8I7,777 (8)8I7,777 (>) D,>77
(:) 8:,777
(6) >,D77 688,?77
(oncontrolling Interest (6) 8,:77 (8) C>,777
(>) :,877 C>,<77
otal *redits <?7,777 ?6>,777 >7>,777 >7>,777 8,:C>,C77
8-32
P8-20 (continued)
c. #ath *orporation and 1ubsidiary
*onsolidated #alance 1heet
@ecember 68, :7A>
*ash and 2eceivables 5 :>:,C77
Inventory 66:,777
#uildings and +$uipment (net) ?D7,777
otal Assets 58,:C>,C77
Accounts /ayable 5 ?>,777
#onds /ayable 5?77,777
#ond /remium :>,777 ?:>,777
1tockholders9 +$uity.
*ontrolling Interest.
*ommon 1tock 5:77,777
2etained +arnings 688,?77
otal *ontrolling interest 5C88,?77
(oncontrolling Interest C>,<77
otal 1tockholders9 +$uity C??,C77
otal Biabilities and 1tockholders9 +$uity 58,:C>,C77
8-33
P8-21 C")75&+&%"$, R2+&%$# &" B"$- P5(!:+, '(") N"$+''%2%+&
a. #alance reported, @ecember 68, :7A> 587C,?77
Amorti&ation of premium during :7A>.
Annual amorti&ation (5C,?77 E I years) 5D77
/ortion of year held x .IC
Amorti&ed in :7A> ?77
/urchase price of bonds 587?,:77
b. *arrying value of liability at date of ac$uisition.
*arrying value at year"end 587I,777
/remium amorti&ed between date of purchase
and @ecember 68, :7A> (58,777 x .IC) IC7
*arrying value at ac$uisition 587I,IC7
/urchase price (87?,:77)
Jain on constructive retirement 5 8,CC7
+(8) #onds /ayable 877,777
#ond /remium I,777
Interest Income ?,<77
Investment in #liss *ompany #onds 87C,?77
Interest +xpense ?,IC7
Jain on #ond 2etirement 8,CC7
+limination of interest income.
Interest income at nominal rate
(5877,777 x .87) 587,777
Annual amorti&ation of premium by /arsons (D77)
Annual interest income recorded by /arsons 5 <,:77
/ortion of year held by /arsons x .IC
Interest income for :7A> 5 ?,<77
+limination of interest expense.
Interest expense at nominal rate
(5877,777 x .87) 587,777
Annual amorti&ation of premium by #liss
(587,777 E 87 years) (8,777)
Annual interest expense recorded by #liss 5 <,777
/ortion of year held by /arsons x .IC
Interest expense eliminated 5 ?,IC7
+(:) Interest /ayable C,777
Interest 2eceivable C,777
8-34
P8-22 C")75&+&%"$, '"22".%$# P+($&<, A!=5%,%&%"$ "' S5/,%-%+(0 B"$-,
a. #ook value of bonds purchased by %ainstream *orporation.
#alance reported, @ecember 68, :7AC 5888,:C7
Amorti&ation of premium in :7A> and :7AC
(588,:C7 E 6 years) x : years I,C77
#alance at date of purchase 588D,IC7
/roportion of bonds purchased by %ainstream x .>7
#ook value of bonds purchased 5>I,C77
Amount paid by %ainstream to purchase bonds.
#ond investment, @ecember 68, :7AC 5>:,>77
Amorti&ation of premium in :7A> and :7AC
(5:,>77 E 6 years) x : years 8,?77
/urchase price (>>,777)
Jain on bond retirement 5 6,C77
b. #onds /ayable >7,777
#ond /remium >,C77
Interest Income 6,:77
Investment in 'ffenberg *ompany #onds >:,>77
Interest +xpense :,C77
2etained +arnings, 3anuary 8 :,:>7
(oncontrolling Interest C?7
5>,C77 G 588,:C7 x .>7
56,:77 G (5>7,777 x .87) " 5D77
5:,C77 G (5>7,777 x .87) " (56,IC7 x .>7)
5:,:>7 G (56,C77 " 5I77) x .D7
5C?7 G (56,C77 " 5I77) x .:7
c. 2etained earnings of %ainstream *orporation 5C77,777
!nrecogni&ed gain on bond retirement.
Jain at date of repurchase 56,C77
Interest differential recogni&ed
;(56,:77 " 5:,C77) x : years= (8,>77)
!nrecogni&ed balance 5:,877
/roportion of stock held by %ainstream x .D7
8,?D7
*onsolidated retained earnings 5C78,?D7
8-35
P8-23 C"$,"2%-+&%"$ W"(;7+7( > Y+( "' R&%()$&
a. +limination +ntries (not re$uired).
+(8) Income from 1ubsidiary 8D,777
Investment in #rown *orporation 8:,777
58D,777 G 567,777 x .?7
+(:) Income to (oncontrolling Interest 8>,<?7
(oncontrolling Interest 87,<?7
58>,<?7 G (567,777 H 5I,777 H 5>77) x .>7
+(6) *ommon 1tock L #rown *orporation 877,777
Investment in #rown 1tock <7,777
(oncontrolling Interest ?7,777
+(>) #onds /ayable C7,777
#ond /remium I,777
Investment in #rown #onds C7,777
5I,777 G 5:D,777 E >
+(C) 2etained +arnings, 3anuary 8 6,6?7
(oncontrolling Interest :,:>7
'perating +xpenses >77
@epreciable Assets (net) C,:77
+liminate unreali&ed gain on upstream
sale of building.
56,6?7 G ;5?,777 " (5?,777 E 8C)= x .?7
5:,:>7 G ;5?,777 " (5?,777 E 8C)= x .>7
5>77 G (567,777 E 8C) " (5>7,777 E :C)
5C,:77 G ;567,777 " (5:,777 x :)=
" ;5>7,777 " (58,?77 x 8:)=
8-36
P8-23 (continued)
yler %anufacturing and #rown *orporation
@ecember 68, :7A6
yler #rown +liminations *onsol"
Item %fg. *orp. @ebit *redit idated
1ales >77,777 :77,777 ?77,777
Income from 1ubsidiary 8D,777 (8) 8D,777
Jain on #ond 2etirement (>) I,777 I,777
*redits >8D,777 :77,777 ?7I,777
Interest +xpense :7,777 :7,777 >7,777
'perating +xpenses 67:,:77 8C7,777 (C) >77 >C8,D77
@ebits (6::,:77) (8I7,777) (><8,D77)
*onsolidated (et Income 88C,:77
Income to (oncon"
trolling Interest (:) 8>,<?7 (8>,<?7)
Income, carry forward <C,D77 67,777 6:,<?7 I,>77 877,:>7
2et. +arnings, 3an. 8 8C7,777 C7,777 (6) C7,777
(C) 6,6?7 8>?,?>7
Income, from above <C,D77 67,777 6:,<?7 I,>77 877,:>7
:>C,D77 D7,777 :>?,DD7
(:) >,777 (>7,777)
carry forward :7C,D77 I7,777 D?,6:7 8I,>77 :7?,DD7
*ash ?D,777 CC,777 8:6,777
Accounts 2eceivable 877,777 IC,777 8IC,777
Inventory 8:7,777 887,777 :67,777
@epreciable Assets (net) 6?7,777 :87,777 (C) C,:77 C?>,D77
Investment in.
#rown #onds C7,777 (>) C7,777
#rown 1tock 87:,777 (8) 8:,777
(6) <7,777
@ebits D77,777 >C7,777 8,7<:,D77
Accounts /ayable <>,:77 C:,777 8>?,:77
#onds /ayable :77,777 :77,777 (>) C7,777 6C7,777
#ond /remium :D,777 (>) I,777 :8,777
*ommon 1tock 677,777 877,777 (6)877,777 677,777
2etained +arnings,
from above :7C,D77 I7,777 D?,6:7 8I,>77 :7?,DD7
(oncontrolling Interest (C) :,:>7 (:) 87,<?7
(6) ?7,777 ?D,I:7
*redits D77,777 >C7,777 :>C,C?7 :>C,C?7 8,7<:,D77
8-37
P8-23 (continued)
b. yler %anufacturing and 1ubsidiary
@ecember 68, :7A6
*ash 5 8:6,777
Accounts 2eceivable 8IC,777
Inventory :67,777
otal *urrent Assets 5 C:D,777
@epreciable Assets (net) C?>,D77
otal Assets 58,7<:,D77
Accounts /ayable 5 8>?,:77
#onds /ayable 56C7,777
#ond /remium :8,777 6I8,777
*ommon 1tock 5677,777
2etained +arnings :7?,DD7
otal *ontrolling Interest 5C7?,DD7
(oncontrolling Interest ?D,I:7
otal 1tockholders9 +$uity CIC,?77
otal Biabilities and 1tockholders) +$uity 58,7<:,D77
yler %anufacturing and 1ubsidiary
*onsolidated Income 1tatement
Mear +nded @ecember 68, :7A6
1ales 5?77,777
otal 2evenue 5?7I,777
Interest +xpense 5 >7,777
'perating +xpenses >C8,D77
otal +xpenses (><8,D77)
*onsolidated (et Income 588C,:77
Income to (oncontrolling Interest (8>,<?7)
Income to *ontrolling Interest 5877,:>7
yler %anufacturing and 1ubsidiary
*onsolidated 1tatement of 2etained +arnings
Mear +nded @ecember 68, :7A6
2etained +arnings, 3anuary 8, :7A6 58>?,?>7
Income to *ontrolling Interest, :7A6 877,:>7
5:>?,DD7
@ividends @eclared, :7A6 (>7,777)
2etained +arnings, @ecember 68, :7A6 5:7?,DD7
8-38
P8-24 C"$,"2%-+&%"$ W"(;7+7( > Y+( +'&( R&%()$&
a. +limination +ntries (not re$uired).
+(8) Income from 1ubsidiary 67,777
Investment in 1tone *ontainer 1tock :>,777
567,777 G 5C7,777 x .?7
+(:) Income to (oncontrolling Interest :7,>77
(oncontrolling Interest 8?,>77
Income to (oncontrolling Interest.
2eported net income of 1tone
*ontainer
5C7,777
Amorti&ation of loss on bond
retirement.
*arrying value of bond investment 587?,777
/ar value of debt 877,777)
!namorti&ed premium paid by
#ennett 5 ?,777
(umber of years until maturity N ?
Amorti&ation of premium annually 8,777
2eali&ed net income of 1tone
*ontainer 5C8,777
noncontrolling interest x .>7
Income to (oncontrolling Interest 5:7,>77
+(6) *ommon 1tock L #rown *orporation 877,777
2etained +arnings, 3anuary 8 I7,777
Investment in #rown 1tock 87:,777
(oncontrolling Interest ?D,777
+(>) #onds /ayable 877,777
2etained +arnings >,:77
(oncontrolling Interest :,D77
Investment in 1tone *ontainer #onds 87?,777
Interest +xpense <,777
8-39
P8-24 (continued)
a. #ennett *orporation and 1tone *ontainer *ompany
@ecember 68, :7A>
#ennett 1tone +liminations *onsol"
Item *orp. *ontainer @ebit *redit idated
1ales >C7,777 :C7,777 I77,777
Interest Income D,777 (>) D,777
Income from 1ubsidiary 67,777 (8) 67,777
*redits >DD,777 :C7,777 I77,777
Interest +xpense :7,777 8D,777 (>) <,777 :<,777
'ther +xpenses 6?D,?77 8D:,777 CC7,?77
@ebits (6DD,?77) (:77,777) (CI<,?77)
*onsolidated (et Income 8:7,>77
Income to (oncon"
trolling Interest (:) :7,>77 (:7,>77)
Income, carry forward <<,>77 C7,777 CD,>77 <,777 877,777
2et. +arnings, 3an. 8 :8>,:77 I7,777 (6) I7,777
(>) >,:77 :87,777
Income, from above <<,>77 C7,777 CD,>77 <,777 877,777
686,?77 8:7,777 687,777
(:) >,777 (>7,777)
carry forward :I6,?77 887,777 86:,?77 8<,777 :I7,777
*ash ?8,?77 :7,777 D8,?77
Accounts 2eceivable 877,777 D7,777 8D7,777
Inventory 8:7,777 887,777 :67,777
'ther Assets 6>7,777 :C7,777 C<7,777
Investment in 1tone
*ontainer #onds 87?,777 (>)87?,777
Investment in 1tone
*ontainer 1tock 8:?,777 (8) :>,777
(6)87:,777
@ebits DC6,?77 >?7,777 8,7D8,?77
Accounts /ayable D7,777 C7,777 867,777
#onds /ayable :77,777 :77,777 (>)877,777 677,777
*ommon 1tock 677,777 877,777 (6)877,777 677,777
2etained +arnings,
from above :I6,?77 887,777 86:,?77 8<,777 :I7,777
(oncontrolling Interest (>) :,D77 (:) 8?,>77
(6) ?D,777 D8,?77
*redits DC6,?77 >?7,777 66C,>77 66C,>77 8,7D8,?77
8-40
P8-24 (continued)
b. #ennett *orporation and 1ubsidiary
@ecember 68, :7A>
*ash 5 D8,?77
Accounts 2eceivable 8D7,777
Inventory :67,777
otal *urrent Assets 5 ><8,?77
'ther Assets C<7,777
otal Asset 58,7D8,?77
Accounts /ayable 5 867,777
#onds /ayable 677,777
*ommon 1tock 5677,777
2etained +arnings :I7,777
otal *ontrolling Interest 5CI7,777
(oncontrolling Interest D8,?77
otal 1tockholders9 +$uity ?C8,?77
otal Biabilities and 1tockholders9 +$uity 58,7D8,?77
#ennett *orporation and 1ubsidiary
*onsolidated Income 1tatement
@ecember 68, :7A>
1ales 5I77,777
Interest +xpense 5 :<,777
'ther +xpenses CC7,?77
otal +xpenses (CI<,?77)
Income to (oncontrolling Interest (:7,>77)
Income to *ontrolling Interest 5877,777
#ennett *orporation and 1ubsidiary
*onsolidated 1tatement of 2etained +arnings
Mear +nded @ecember 68, :7A>
2etained +arnings, 3anuary 8, :7A> 5:87,777
Income to *ontrolling Interest, :7A> 877,777
5687,777
@ividends @eclared, :7A> (>7,777)
2etained +arnings, @ecember 68, :7A> 5:I7,777
8-41
P8-25 I$&(!"(7"(+& I$9$&"(0 +$- D/& T(+$,'(,
a. *onsolidated cost of goods sold for :7AI.
Amount reported by Bance *orporation 5?:7,777
Amount reported by Avery *ompany :>7,777
Ad,ustment for unreali&ed profit in
beginning inventory sold in :7AI (8C,777)
Ad,ustment for inventory purchased from
subsidiary and resold during :7AI.
*J1 recorded by Bance 5>7,777
*J1 recorded by Avery (5?7,777 " 5:I,777) 66,777
otal recorded 5I6,777
*J1 based on Bance)s cost
;5>7,777 x (566,777 E 5?7,777)= (::,777)
2e$uired ad,ustment (C8,777)
*ost of goods sold 5I<>,777
b. *onsolidated inventory balance.
Amount reported by Bance 58?I,777
Amount reported by Avery 8:7,777
otal inventory reported 5:DI,777
!nreali&ed profit in ending inventory held by
Avery ;5:7,777 x (5:I,777 E 5?7,777)= (<,777)
*onsolidated balance 5:ID,777
c. +ntry to record interest expense for Avery *ompany.
Interest +xpense 8C,:77
#ond /remium D77
*ash 8?,777
*omputation of interest expense
/ar value of bonds issued 5:77,777
1tated interest rate x .7D
Annual interest payment 5 8?,777
Annual amorti&ation of premium (5>,D77 E ? years) (D77)
Interest expense for :7AI 5 8C,:77
8-42
P8-25 (continued)
d. +ntry to record interest income for Bance *orporation.
*ash ?,>77
Investment in Avery *ompany #onds :77
Interest Income ?,?77
*omputation of interest income
Annual payment received (5D7,777 x .7D) 5?,>77
Amorti&ation of discount
;(5D7,777 " 5ID,>77) E D years= :77
Interest income for :7AI 5?,?77
e. Income assigned to noncontrolling interest.
(et income reported by Avery *ompany 5>D,777
Ad,ustment for reali&ation of profit on inventory
sold to Bance in :7A? 8C,777
Ad,ustment for reali&ation of constructive gain on
bond retirement (5>,8?7 E D years) (C:7)
2eali&ed net income of Avery for :7AI 5?:,>D7
/roportion of ownership held by noncontrolling
Interest x .:C
Income assigned to noncontrolling interest 58C,?:7
*omputation of constructive gain on bond retirement
#ond premium, @ecember 68, :7AI 5>,D77
2emaining years9 to maturity N ?
Amorti&ation per year 5 D77
Mears9 to maturity at purchase x D
/remium, @ecember 68, :7AC ?,>77
#ook value of bonds 5:7?,>77
/roportion purchased x .>7
#ook value of bonds purchased 5 D:,C?7
/urchase price (ID,>77)
*onstructive gain 5 >,8?7
f. +liminating entries.
+(8) Income from 1ubsidiary 6?,777
@ividends @eclared 8D,777
Investment in Avery *ompany 1tock 8D,777
+(:) Income to (oncontrolling Interest 8C,?:7
(oncontrolling Interest <,?:7
58C,?:7 G (5>D,777 H 58C,777 " 5C:7) x .:C
8-43
8-44
P8-25 (continued)
+(6) *ommon 1tock K Avery *ompany C7,777
2etained +arnings, 3anuary 8 8I7,777
Investment in Avery *ompany 1tock 8?C,777
(oncontrolling Interest CC,777
+(>) 2etained +arnings, 3anuary 8 88,:C7
(oncontrolling Interest 6,IC7
*ost of Joods 1old 8C,777
+liminate beginning inventory profit
of Avery *ompany.
588,:C7 G 58C,777 x .IC
56,IC7 G 58C,777 x .:C
+(C) 1ales ?7,777
*ost of Joods 1old C8,777
Inventory <,777
+liminate intercompany sale of inventory
by Bance *orporation.
+(?) #onds /ayable D7,777
#ond /remium 8,<:7
Interest Income ?,?77
Investment on Avery *ompany #onds ID,D77
Interest +xpense ?,7D7
2etained +arnings, 3anuary 8 :,I67
(oncontrolling Interest <87
58,<:7 G (56,:77 E 87 years) x ? years
5?,?77 G (5D7,777 x .7D) H (58,?77 E D years)
5ID,D77 G 5ID,>77 H ;(58,?77 E D years) x : years=
5?,7D7 G (5D7,777 x .7D) " (56,:77 E 87 years)
5:,I67 G (5>,8?7 " 5C:7) x .IC
5<87 G (5>,8?7 " 5C:7) x .:C
8-45
P8-25 (continued)
g. Bance *orporation and Avery *ompany
@ecember 68, :7AI
Bance Avery +liminations *onsol"
1ales IC7,777 6:7,777 (C) ?7,777 8,787,777
Interest and 'ther
Income 8?,777 C,777 (?) ?,?77 8>,>77
Income from 1ubsidiary 6?,777 (8) 6?,777
*redits D7:,777 6:C,777 8,7:>,>77
*ost of Joods 1old ?:7,777 :>7,777 (>) 8C,777
(C) C8,777 I<>,777
@epreciation +xpense >C,777 8C,777 ?7,777
Interest and 'ther
+xpenses 6C,777 ::,777 (?) ?,7D7 C7,<:7
@ebits (I77,777) (:II,777) (<7>,<:7)
*onsolidated (et Income 88<,>D7
Income to (oncon"
trolling Interest (:) 8C,?:7 (8C,?:7)
Income, carry forward 87:,777 >D,777 88D,::7 I:,7D7 876,D?7
2et. +arnings, 3an. 8 :<8,I77 8I7,777 (6)8I7,777 (?) :,I67
(>) 88,:C7 :D6,8D7
Income, from above 87:,777 >D,777 88D,::7 I:,7D7 876,D?7
6<6,I77 :8D,777 6DI,7>7
@ividends @eclared (C7,777) (:>,777) (8) 8D,777
(:) ?,777 (C7,777)
carry forward 6>6,I77 8<>,777 :<<,>I7 <D,D87 66I,7>7
*ash 6I,<77 >D,D77 D?,I77
Accounts 2eceivable 887,777 87C,777 :8C,777
'ther 2eceivables 67,777 8C,777 >C,777
Inventory 8?I,777 8:7,777 (C) <,777 :ID,777
Band <7,777 >7,777 867,777
#uildings and +$uipment C77,777 :C7,777 IC7,777
Investment in Avery
*ompany #onds ID,D77 (?) ID,D77
Investment in Avery
*ompany 1tock 8D6,777 (8) 8D,777
(6)8?C,777
@ebits 8,8<?,I77 CID,D77 8,C7>,I77
8-46
P8-25 (continued)

Bance Avery +liminations *onsol"
Accum. @epreciation 8CC,777 IC,777 :67,777
Accounts /ayable 88D,777 6C,777 8C6,777
'ther /ayables >7,777 :7,777 ?7,777
#onds /ayable :C7,777 :77,777 (?) D7,777 6I7,777
#ond /remium >,D77 (?) 8,<:7 :,DD7
*ommon 1tock
Bance *orporation :C7,777 :C7,777
Avery *ompany C7,777 (6) C7,777
Additional /aid"In
*apital >7,777 >7,777
2etained +arnings,
from above 6>6,I77 8<>,777 :<<,>I7 <D,D87 66I,7>7
(oncontrolling
Interest (>) 6,IC7 (:) <,?:7
(6) CC,777
(?) <87 ?8,ID7
*redits 8,8<?,I77 CID,D77 >6C,8>7 >6C,8>7 8,C7>,I77
8-47
P8-26 I$&(!"(7"(+& B"$- H"2-%$#, +$- O&:( T(+$,'(,
a. +liminating entries, @ecember 68, :7AD.
+(8) Income from 1ubsidiary ::,C77
@ividends @eclared I,C77
Investment in 1kate *ompany 1tock 8C,777
+(:) Income to (oncontrolling Interest I,?C7
@ividends @eclared :,C77
(oncontrolling Interest C,8C7
5I,?C7 G (567,777 H 5?77) x .:C
+(6) *ommon 1tock L 1kate *ompany 67,777
Additional /aid"In *apital L 1kate *ompany :7,777
2etained +arnings, 3anuary 8 8C7,777
Investment in 1kate *ompany 1tock 8C7,777
(oncontrolling Interest C7,777
+(>) #uildings and +$uipment ?7,777
2etained +arnings, 3anuary 8 8C,777
@epreciation +xpense 8,C77
Accumulated @epreciation I6,C77
+liminate unreali&ed profit on buildings.
5?7,777 G 58:C,777 " 5?C,777
58C,777 G 5?C,777 " (58:C,777 " 5IC,777)
58,C77 G (5?C,777 E 87 years) " (58:C,777 E :C years)
5I6,C77 G (5C,777 x 8? years) " (5?,C77 x 8 year)
+(C) 2etained +arnings, 3anuary 8 <,IC7
(oncontrolling Interest 6,:C7
Band 86,777
+liminate unreali&ed profit on land.
8-48
P8-26 (continued)
+(?) #onds /ayable >7,777
2etained +arnings, 3anuary 8 6,8C7
(oncontrolling Interest 8,7C7
Investment in 1kate *ompany #onds >:,>77
#ond @iscount 8,:77
56,?77 G (5>7,777 x .87) " (5:,D77 E I years)
56,8C7 G (5>:,D77 " 56D,?77) x .IC
58,7C7 G (5>:,D77 " 56D,?77) x .:C
5>:,>77 G 5>:,D77 " (5:,D77 E I years)
5>,:77 G (5>7,777 x .87) H (5:,777 E 87 years)
58,:77 G (5:,777 E 87 years) x ? years
+(I) Interest and 'ther /ayables :,777
Interest and 'ther 2eceivables :,777
+liminate intercompany interest
receivableEpayable.
P8-26 (continued)
b. /ond *orporation and 1kate *ompany
@ecember 68, :7AD
/ond 1kate +liminations *onsol"
1ales >C7,777 :C7,777 I77,777
Income from 1ubsidiary ::,C77 (8) ::,C77
Interest Income 8D,C77 (?) 6,?77 8>,<77
*redits ><8,777 :C7,777 I8>,<77
*ost of Joods 1old :DC,777 86?,777 >:8,777
'ther 'perating +xpenses C7,777 >7,777 <7,777
@epreciation +xpense 6C,777 :>,777 (>) 8,C77 CI,C77
Interest +xpense :>,777 87,C77 (?) >,:77 67,677
%iscellaneous +xpenses 88,<77 <,C77 :8,>77
@ebits (>7C,<77) (::7,777) (?:7,:77)
*onsolidated (et Income <>,I77
Income to (oncon"
trolling Interest (:) I,?C7 (I,?C7)
Income, carry forward DC,877 67,777 66,IC7 C,I77 DI,7C7
2et. +arnings, 3an. 8 :C7,>77 8C7,777 (6)8C7,777
(>) 8C,777
(C) <,IC7
(?) 6,8C7 :::,C77
Income, from above DC,877 67,777 66,IC7 C,I77 DI,7C7
66C,C77 8D7,777 67<,CC7
@ividends @eclared (67,777) (87,777) (8) I,C77
(:) :,C77 (67,777)
carry forward 67C,C77 8I7,777 :88,?C7 8C,I77 :I<,CC7
*ash C6,877 >I,777 877,877
Accounts 2eceivable 8I?,777 ?C,777 :>8,777
Interest and 'ther
2eceivables >C,777 87,777 (I) :,777 C6,777
Inventory 8>7,777 C7,777 8<7,777
Band C7,777 ::,777 (C) 86,777 C<,777
#uildings and +$uipment >77,777 :>7,777 (>) ?7,777 I77,777
Investment in 1kate.
*ompany 1tock 8?C,777 (8) 8C,777
(6)8C7,777
*ompany #onds >:,>77 (?) >:,>77
Investment in in *o.
#onds 86>,777 86>,777
#ond @iscount 6,777 (?) 8,:77 8,D77
@ebits 8,:7C,C77 >6I,777 8,>ID,<77
P8-26 (continued)
/ond 1kate +liminations *onsol"
Accum. @epreciation 8DC,777 <>,777 (>) I6,C77 6C:,C77
Accounts /ayable ?C,777 88,777 I?,777
Interest O 'ther /ayables >C,777 8:,777 (I) :,777 CC,777
#onds /ayable 677,777 877,777 (?) >7,777 6?7,777
*ommon 1tock
/ond *orporation 8C7,777 8C7,777
1kate *ompany 67,777 (6) 67,777
Additional /aid"In
*apital 8CC,777 :7,777 (6) :7,777 8CC,777
2etained +arnings,
from above 67C,C77 8I7,777 :88,?C7 8C,I77 :I<,CC7
(oncontrolling
Interest (C) 6,:C7 (:) C,8C7
(?) 8,7C7 (6) C7,777 C7,DC7
*redits 8,:7C,C77 >6I,777 6?I,<C7 6?I,<C7 8,>ID,<77
P8-27 C")7(:$,%9 M52&%72-C:"%! Q5,&%"$,
8. b 56I>,777 ;5:77,777 H 58D7,777 " .67(5I7,777 " 5C7,777)=
:. b 5:<>,777 ;5::7,777 H 58>7,777 " 5:,777 " (5I7,777 " 5?,777)=
6. a 5I,>77 ;(5877,777 x .7<) " (5?,>77 premium E > years)=
>. b 56:,777 ;5:>,777 H (58?,777 E :)=
C. b 586,8:C (5:<6,8:C " 5:77,777 " 5C7,777 " 567,777)
?. d 5D6,777 (5C7,777 H 567,777 H 56,777)
I. b 56,777 /urchase price
;587?,>77 H (5?,>77 E > years)= 587D,777
#ook value ;5877,777 H 5>,777 H
(5>,777 E > years)= (87C,777)
Boss on bond retirement 5 6,777
2eported net income of Jrange *orporation 5>7,777
Add. Inventory profits of prior period
reali&ed in :7A? :,777
Bess. !nreali&ed inventory profits of
:7A? (?,777)
Bess. Boss on bond retirement,
3anuary 8, :7A? (6,777)
Add. Interest differential in :7A? ?77
2eali&ed income of Jrange 566,?77
Bess. @epreciation on differential assigned
to buildings and e$uipment (6,777)
Bess. Impairment of goodwill (I,C77)
Ad,usted income 5:6,877
Income assigned to noncontrolling interest 5 >,?:7
/ar value of shares outstanding 5:77,777
2etained earnings, @ecember 68, :7A? 8:C,777
Bess. !nreali&ed inventory profit (?,777)
!nrecorded portion of bond
retirement loss (56,777 " 5?77) (:,>77)
Add. !namorti&ed differential assigned to
buildings and e$uipment (567,777 "
5<,777) :8,777
!nimpaired goodwill (586,8:C " 5I,C77) C,?:C
56>6,::C
Assigned to noncontrolling interest 5 ?D,?>C
(586,8:C " 5I,C77)
P8-28 C")7(:$,%9 P("/2)? I$&(!"(7"(+& T(+$,'(,
a. Joodwill as of 3anuary 8, :7AI.
-air value of consideration given by opp 58,8C:,777
-air value of noncontrolling interest at ac$uisition 8:D,777
otal 58,:D7,777
#ook value of net assets at ac$uisition (8,:77,777)
@ifferential at ac$uisition 5 D7,777
Increase in fair value of land (67,777)
Joodwill at ac$uisition 5 C7,777
b. *omputation of balance in investment account, 3anuary 8, :7AI.
#ussman stockholders) e$uity, 3anuary 8, :7AI.
*ommon stock 5 C77,777
/remium on common stock :D7,777
2etained earnings >I7,777
1tockholders) e$uity, 3anuary 8, :7AI 58,:C7,777
opp)s ownership share x .<7
#ook value of shares held by opp 58,8:C,777
@ifferential at 3anuary 8, :7AI (5D7,777 x .<7) I:,777
#alance in Investment in #ussman 1tock account,
3anuary 8, :7AI 58,8<I,777
*omputation of balance in investment account, @ecember 68, :7AI.
(not re$uired)
3anuary 8, :7AI 58,8<I,777
Add. Income from subsidiary, :7AI <7,777
Bess. @ividends received (5>7,777 x .<7) (6?,777)
@ecember 68, :7AI 58,:C8,777
c. Jain on constructive retirement of #ussman)s bonds.
'riginal proceeds from issuance of #ussman bonds 58,787,777
/remium amorti&ed to 3anuary :, :7AI.
(587,777 E 87) x ? (?,777)
#ook value of bonds at constructive retirement 58,77>,777
/rice paid for #ussman bonds by opp (<D7,777)
Jain on constructive retirement of #ussman)s bonds 5 :>,777
d. Income to noncontrolling interest, :7AI.
#ussman)s :7AI net income 5877,777
Add. :7A? intercompany profit reali&ed in :7AI >,C77
*onstructive gain on retirement of bonds :>,777
Bess. !nreali&ed intercompany profit on :7AI transfer (C,>77)
/ortion of constructive gain on bond retirement
recogni&ed currently by separate affiliates
(5:>,777 E > years) (?,777)
Impairment of goodwill (:C,777)
1ubsidiary income to be apportioned 5 <:,877
(oncontrolling interest)s proportionate share x .87
Income to noncontrolling interest 5 <,:87
P8-28 (continued)
e. otal noncontrolling interest, @ecember 68, :7A?.
#ussman)s stockholders) e$uity, @ecember 68, :7A? 58,:C7,777
!nreali&ed profit on intercompany sale of inventory (>,C77)
#ussman)s reali&ed e$uity, @ecember 68, :7A? 58,:>C,C77
@ifferential assigned to land 67,777
@ifferential assigned to goodwill C7,777
58,6:C,C77
(oncontrolling interest)s proportionate share x .87
otal noncontrolling interest, @ecember 68, :7A? 5 86:,CC7
f. +limination entries.
+(8) Income from 1ubsidiary <7,777
@ividends @eclared 6?,777
Investment in #ussman 1tock C>,777
+(:) Income to (oncontrolling Interest <,:87
(oncontrolling Interest C,:87
5<,:87 G ;5877,777 H (5:>,777 " 5?,777)
H 5>,C77 " 5C,>77 " 5:C,777= x .87
+(6) *ommon 1tock K #ussman C77,777
/remium on *ommon 1tock :D7,777
2etained +arnings, 3anuary 8 >I7,777
@ifferential D7,777
Investment in #ussman 1tock 8,8<I,777
(oncontrolling Interest 866,777
5D7,777 G 58,:D7,777 " 58,:77,777
5866,777 G (5C77,777 H 5:D7,777 H
5>I7,777 H 5D7,777) x .87
+(>) Band 67,777
Joodwill C7,777
@ifferential D7,777
Assign differential.
+(C) Joodwill Impairment Boss :C,777
Joodwill :C,777
2ecogni&e impairment of goodwill.
+(?) #onds /ayable :77,777
Investment in opp #onds :77,777
+liminate intercompany holdings of opp
bonds.
P8-28 (continued)
+(I) 'ther Income :7,777
'ther +xpenses :7,777
+liminate interest on intercompany
holdings of opp bonds. 5:77,777 x .87
+(D) *urrent /ayables C,777
*urrent 2eceivables C,777
+liminate accrued interest on intercompany
holdings of opp bonds.
(5:77,777 x .87) x 8 E > year
+(<) #onds /ayable 8,777,777
/remium on #onds /ayable 6,777
'ther Income (Interest) 8:C,777
Investment in #ussman #onds <DC,777
Jain on 2etirement of #onds :>,777
'ther +xpenses (Interest) 88<,777
+liminate intercompany holdings of
#ussman bonds.
58:C,777 G (58,777,777 x .8:) H 5C,777
5:>,777 G 58,77>,777 " 5<D7,777
588<,777 G (58,777,777 x .8:) " 58,777
+(87) 2etained +arnings, 3anuary 8 >,7C7
(oncontrolling Interest >C7
*ost of Joods 1old >,C77
+liminate beginning inventory profit.
5>,7C7 G 5>,C77 x .<7
5>C7 G 5>,C77 x .87
5>,C77 G 58C,777 x .67
+(88) 1ales ID,777
*ost of Joods 1old I:,?77
Inventory C,>77
+liminate upstream intercompany sale of
inventory.
5I:,?77 G (5ID,777 " 58D,777)
H (58D,777 x .I7)
5C,>77 G 58D,777 x .67
+(8:) *urrent /ayables <,777
*urrent 2eceivables <,777
+liminate intercompany dividend owed.
587,777 x .<7
P8-28 (continued)
g. opp %anufacturing and #ussman *orporation
@ecember 68, :7AI
opp +liminations *onsol"
Item *orp. #ussman @ebit *redit idated
1ales 6,878,777 I<7,777 (88) ID,777 6,D86,777
Income from 1ubsidiary <7,777 (8) <7,777
'ther Income 86C,777 68,777 (I) :7,777
(<) 8:C,777 :8,777
Jain on 2etirement of
#onds (<) :>,777 :>,777
*redits 6,6:?,777 D:8,777 6,DCD,777
*ost of Joods 1old :,77<,777 >67,777 (87) >,C77
(88) I:,?77 :,6?8,<77
@eprec. and Amorti&ation 8<C,777 DC,777 :D7,777
Joodwill Impairment Boss (C) :C,777 :C,777
'ther +xpenses ?>6,777 :7?,777 (I) :7,777
(<) 88<,777 I87,777
@ebits (:,D>I,777) (I:8,777) (6,6I?,<77)
*onsolidated (et Income >D8,877
Income to (*I (:) <,:87 (<,:87)
Income, carry forward >I<,777 877,777 6>I,:87 :>7,877 >I8,D<7
2et. +arnings, 3an. 8 6,766,777 >I7,777 (6) >I7,777
(87) >,7C7 6,7:D,<C7
Income, from above >I<,777 877,777 6>I,:87 :>7,877 >I8,D<7
6,C8:,777 CI7,777 6,C77,D>7
@ividends @eclared (C7,777) (>7,777) (8) 6?,777
(:) >,777 (C7,777)
2et. +arnings, @ec. 68, 6,>?:,777 C67,777 D:8,:?7 :D7,877 6,>C7,D>7
*ash 6<,C77 :<,777 ?D,C77
*urrent 2eceivables 88:,C77 DC,877 (D) C,777
(8:) <,777 8D6,?77
Inventory 678,777 6>D,<77 (88) C,>77 ?>>,C77
Invest. in #ussman 1tock 8,:C8,777 (8) C>,777
(6)8,8<I,777
Invest. in #ussman #onds <DC,777 (<) <DC,777
Invest. in opp #onds :77,777 (?) :77,777
Band 8,:68,777 C86,777 (>) 67,777 8,II>,777
#uildings and +$uipment :,IC7,777 8,D6C,777 >,CDC,777
Joodwill (>) C7,777 (C) :C,777 :C,777
@ifferential (6) D7,777 (>) D7,777
@ebits ?,?I7,777 6,788,777 I,:D7,?77
Accum. @epreciation 8,:87,777 ?8<,777 8,D:<,777
*urrent /ayables <D,777 I<,777 (D) C,777
(8:) <,777 8?6,777
#onds /ayable :77,777 8,777,777 (?) :77,777
(<)8,777,777
/remium on #onds /ayable 6,777 (<) 6,777
*ommon 1tock 8,777,777 C77,777 (6) C77,777 8,777,777
/remium on *ommon 1tock I77,777 :D7,777 (6) :D7,777 I77,777
2etained +arnings 6,>?:,777 C67,777 D:8,:?7 :D7,877 6,>C7,D>7
(oncontrolling Interest (87) >C7 (:) C,:87
(6) 866,777 86I,I?7
*redits ?,?I7,777 6,788,777 :,<ID,I87 :,<ID,I87 I,:D7,?77
P8-29A 35220 A-@5,&- E=5%&0 M&:"-
a. Ad,usted trial balance.
1tone *ontainer
#ennett *orporation *ompany
Item @ebit *redit @ebit *redit
*ash 5 ?8,?77 5 :7,777
Accounts 2eceivable 877,777 D7,777
Inventory 8:7,777 887,777
'ther Assets 6>7,777 :C7,777
Investment in 1tone *ontainer
#onds 87?,777
Investment in 1tone *ontainer
1tock 8::,>77
Interest +xpense :7,777 8D,777
'ther +xpenses 6?D,?77 8D:,777
@ividends @eclared >7,777 87,777
Accounts /ayable 5 D7,777 5 C7,777
#onds /ayable :77,777 :77,777
*ommon 1tock 677,777 877,777
2etained +arnings :87,777 I7,777
1ales >C7,777 :C7,777
Income from 1ubsidiary 67,?77
otal 58,:ID,?77 58,:ID,?77 5?I7,777 5?I7,777
b. 3ournal entries recorded by #ennett *orporation.
(8) *ash ?,777
Investment in 1tone *ontainer 1tock ?,777
2ecord dividend from 1tone *ontainer.
587,777 x .?7
(:) Investment in 1tone *ontainer 1tock 67,777
Income from 1ubsidiary 67,777
5C7,777 x .?7
P8-29A (continued)
(6) Investment in 1tone *ontainer 1tock ?77
Income from 1ubsidiary ?77
Ad,ust for portion of loss on
constructive retirement recogni&ed.
(5I,777 E I years) x .?7
*omputation of :7A6 constructive loss on bond retirement
#ond investment, @ecember 68, :7A> 587?,777
Amorti&ation of premium in :7A>.
Interest income based on par value 5 <,777
Interest income recorded by #ennett (D,777)
Amorti&ation of premium 8,777
/urchase price paid by #ennett,
@ecember 68, :7A6 587I,777
#ond liability reported by 1tone
*ontainer, @ecember 68, :7A6 (877,777)
*onstructive loss on bond retirement 5 I,777
+(8) Income from 1ubsidiary 67,?77
Investment in 1tone *ontainer 1tock :>,?77
5:7,>77 G (5C7,777 H 58,777) x .>7
+(6) *ommon 1tock L 1tone *ontainer 877,777
2etained +arnings, 3anuary 8 I7,777
Investment in 1tone *ontainer 1tock 87:,777
(oncontrolling Interest ?D,777
+(>) #onds /ayable 877,777
Investment in 1tone *ontainer 1tock >,:77
5>,:77 G 5I,777 constructive loss x .?7
5:,D77 G 5I,777 constructive loss x .>7
P8-29A (continued)
d. #ennett *orporation and 1tone *ontainer *ompany
@ecember 68, :7A>
1ales >C7,777 :C7,777 I77,777
Interest Income D,777 (>) D,777
Income from 1ubsidiary 67,?77 (8) 67,?77
*redits >DD,?77 :C7,777 I77,777
Interest +xpense :7,777 8D,777 (>) <,777 :<,777
@ebits (6DD,?77) (:77,777) (CI<,?77)
Income to (oncon"
Income, carry forward 877,777 C7,777 C<,777 <,777 877,777
2et. +arnings, 3an. 8 :87,777 I7,777 (6) I7,777 :87,777
Income, from above 877,777 C7,777 C<,777 <,777 877,777
687,777 8:7,777 687,777
(:) >,777 (>7,777)
carry forward :I7,777 887,777 8:<,777 8<,777 :I7,777
*ash ?8,?77 :7,777 D8,?77
Inventory 8:7,777 887,777 :67,777
'ther Assets 6>7,777 :C7,777 C<7,777
Investment in 1tone
*ontainer #onds 87?,777 (>)87?,777
Investment in 1tone
*ontainer 1tock 8::,>77 (>) >,:77 (8) :>,?77
(6)87:,777
@ebits DC7,777 >?7,777 8,7D8,?77
#onds /ayable :77,777 :77,777 (>)877,777 677,777
*ommon 1tock 677,777 877,777 (6)877,777 677,777
2etained +arnings,
from above :I7,777 887,777 8:<,777 8<,777 :I7,777
(oncontrolling Interest (>) :,D77 (:) 8?,>77
(6) ?D,777 D8,?77
*redits DC7,777 >?7,777 66?,777 66?,777 8,7D8,?77
P8-30A C",& M&:"-
a. 3ournal entry recorded by #ennett *orporation.
*ash ?,777
@ividend Income ?,777
2ecord dividend from 1tone *ontainer.
587,777 x .?7
b. +liminating entries, @ecember 68, :7A>.
+(8) @ividend Income ?,777
+liminate dividend income from
subsidiary.
5:7,>77 G (5C7,777 H 58,777) x .>7
+(6) *ommon 1tock L 1tone *ontainer 877,777
2etained +arnings, 3anuary 8 :C,777
Investment in 1tone *ontainer 1tock IC,777
(oncontrolling Interest C7,777
+liminate investment balance
at date of ac$uisition.
5IC,777 G (5877,777 H 5:C,777) x .?7
+(>) 2etained +arnings, 3anuary 8 8D,777
(oncontrolling Interest 8D,777
Assign undistributed prior earnings of
subsidiary to noncontrolling interest.
(5I7,777 " 5:C,777) x .>7
+(C) #onds /ayable 877,777
2etained +arnings, 3anuary 8 >,:77
5>,:77 G 5I,777 constructive loss x .?7
5:,D77 G 5I,777 constructive loss x .>7
P8-30A (continued)
*omputation of :7A6 constructive loss on bond retirement
#ennett)s #ond investment, @ecember 68, :7A> 587?,777
Amorti&ation of premium in :7A>.
Interest income based on par value 5<,777
Interest income recorded by #ennett (D,777)
Amorti&ation of premium 8,777
/urchase price paid by #ennett,
@ecember 68, :7A6 587I,777
#ond liability reported by 1tone
*ontainer, @ecember 68, :7A6 (877,777)
*onstructive loss on bond retirement 5 I,777
P8-30A (continued)
c. #ennett *orporation and 1tone *ontainer *ompany
@ecember 68, :7A>
1ales >C7,777 :C7,777 I77,777
Interest Income D,777 (C) D,777
@ividend Income ?,777 (8) ?,777
*redits >?>,777 :C7,777 I77,777
Interest +xpense :7,777 8D,777 (C) <,777 :<,777
@ebits (6DD,?77) (:77,777) (CI<,?77)
Income to (oncon"
Income, carry forward IC,>77 C7,777 6>,>77 <,777 877,777
2et. +arnings, 3an. 8 8DI,:77 I7,777 (6) :C,777
(>) 8D,777
(C) >,:77 :87,777
Income, from above IC,>77 C7,777 6>,>77 <,777 877,777
:?:,?77 8:7,777 687,777
(:) >,777 (>7,777)
carry forward :::,?77 887,777 D8,?77 8<,777 :I7,777
*ash ?8,?77 :7,777 D8,?77
Inventory 8:7,777 887,777 :67,777
'ther Assets 6>7,777 :C7,777 C<7,777
Investment in 1tone
*ontainer #onds 87?,777 (C)87?,777
Investment in 1tone
*ontainer 1tock IC,777 (6) IC,777
@ebits D7:,?77 >?7,777 8,7D8,?77
#onds /ayable :77,777 :77,777 (C)877,777 677,777
*ommon 1tock 677,777 877,777 (6)877,777 677,777
2etained +arnings,
from above :::,?77 887,777 D8,?77 8<,777 :I7,777
(oncontrolling Interest (C) :,D77 (:) 8?,>77
(6) C7,777
(>) 8D,777 D8,?77
*redits D7:,?77 >?7,777 :D>,>77 :D>,>77 8,7D8,?77

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Chap 008

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Chapter 08 - Intercompany Indebtedness

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