Académique Documents
Professionnel Documents
Culture Documents
Intercompany
Bond Holdings and
Miscellaneous Topics—
Consolidated Financial
Statements
Slide
9-1
Intercompany Bond Holdings
Slide
9-2
LO 1 Constructive retirement of debt.
Accounting for Bonds - A Review
7% Discount Carrying
Date Interest Amortized Amount
1/1/10 $ 85,000
12/31/10 $ 7,000 $ 5,000 * 90,000
12/31/11 7,000 5,000 95,000
12/31/12 7,000 5,000 100,000
Slide
9-4
LO 1 Constructive retirement of debt.
Accounting for Bonds - A Review
Slide
9-5
LO 1 Constructive retirement of debt.
Constructive Gain or Loss on Intercompany
Bond Holdings
Slide
9-6
LO 1 Constructive retirement of debt.
Constructive Gain or Loss
Slide
9-9
LO 2 Allocating the constructive gain or loss.
Constructive Gain or Loss
+ $10,000 - $15,000
Constructive gain Constructive loss
- $5,000
Net constructive loss
Slide
9-10
LO 2 Allocating the constructive gain or loss.
Constructive Gain or Loss
- $10,000 + $15,000
Constructive loss Constructive gain
+ $5,000
Net constructive gain
Slide
9-11
LO 2 Allocating the constructive gain or loss.
Accounting for Intercompany Bonds Illustrated
Slide
9-12
LO 2 Allocating the constructive gain or loss.
Book Entry Related to Bond Investment
Prepare the entry made by P Company to record the bond
investment on December 31, 2012:
Note:
The usual practice of recording a bond investment does not
separate the discount or premium.
Since the bonds were purchased on the open market, there is
no entry made on the issuing company’s books.
Slide
9-13
LO 2 Allocating the constructive gain or loss.
Book Entry Related to Bond Investment
S Company P Company
Book Value Par Value Purchase Price
288,000 > 300,000 < 310,000
- $12,000 - $10,000
Constructive loss Constructive loss
Slide
9-14
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper—2012 Cost Method
P S Eliminations Consolidated
Income Statement Company Company Debit Credit NCI Balances
Sales 3,104,000 2,200,000 5,304,000
Dividend income 16,000 16,000 (5) -
Total revenue 3,120,000 2,200,000 5,304,000
Cost of goods sold 1,700,000 1,360,000 3,060,000
Interest expense 50,000 50,000
Other expenses 1,124,000 665,000 1,789,000
Loss on constructive 10,000 (2)
retirement of bonds 12,000 (3) 22,000
Total cost and expense 2,824,000 2,075,000 4,921,000
Net income 296,000 125,000 383,000
Noncontrolling interest 22,600 (22,600)
Net income 296,000 125,000 38,000 - 22,600 360,400
Retained Earnings Statement
Retained earnings, 1/1 1,650,000 700,000 700,000 (6) 160,000 (1) 1,810,000
Net income 296,000 125,000 38,000 - 22,600 360,400
Dividends declared (150,000) (20,000) 16,000 (5) (4,000) (150,000)
Retained earnings, 12/31 1,796,000 805,000 738,000 176,000 18,600 2,020,400
Balance Sheet
Investment in S Co. bonds 310,000 10,000 (2) -
300,000 (4)
Investment in S. Co. stock 1,200,000 160,000 (1) 1,360,000 (6) -
Other assets 5,420,000 2,620,000 8,040,000
Total assets 6,930,000 2,620,000 8,040,000
9% bonds payable 500,000 300,000 (4) 200,000
Discount on bonds payable (20,000) 12,000 (8,000)
Other liabilities 2,134,000 335,000 2,469,000
Capital stock 3,000,000 1,000,000 1,000,000 (6) 3,000,000
Retained earnings 1,796,000 805,000 738,000 176,000 18,600 2,020,400
NCI in net assets 1/1 340,000 (6) 340,000 -
NCI in net assets 12/31 358,600 358,600
Slide Total liab. & equity 6,930,000 2,620,000 2,198,000 2,198,000 8,040,000
9-15
Consolidated Statements Workpaper—2012 Cost Method
P S Eliminations Consolidated
Income Statement Company Company Debit Credit NCI Balances
Sales 3,104,000 2,200,000 5,304,000
Dividend income 16,000 16,000 (5) -
Total revenue 3,120,000 2,200,000 5,304,000
Cost of goods sold 1,700,000 1,360,000 3,060,000
Interest expense 50,000 50,000
Other expenses 1,124,000 665,000 1,789,000
Loss on constructive 10,000 (2)
Slide
9-16
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper—2012 Cost Method
P S Eliminations Consolidated
Balance Sheet Company Company Debit Credit NCI Balances
Investment in S Co. bonds 310,000 10,000 (2) -
300,000 (4)
Slide
9-17
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper—2012
Slide
9-18
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper—2012
Entries (2) and (3) recognize the constructive loss allocated to each company and
adjust bond investment and carrying value of the intercompany debt to par value.
Slide
9-19
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper—2012
Slide
9-21
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper —2013 Complete Equity
Method
P S Eliminations Consolidated
Income Statement Company Company Debit Credit NCI Balances
Sales 3,104,000 2,200,000 5,304,000
Equity income 80,400 80,400 (3) -
Total revenue 3,184,400 2,200,000 5,304,000
Cost of goods sold 1,700,000 1,360,000 3,060,000
Interest expense 50,000 50,000
Other expenses 1,124,000 665,000 1,789,000
Loss on retirement 22,000 (1) 22,000
Total cost and expense 2,824,000 2,075,000 4,921,000
Net income 360,400 125,000 383,000
Noncontrolling interest 22,600 (22,600)
Net income 360,400 125,000 102,400 - 22,600 360,400
Retained Earnings Statement
Retained earnings, 1/1 1,810,000 700,000 700,000 (4) 1,810,000
Net income 360,400 125,000 102,400 - 22,600 360,400
Dividends declared (150,000) (20,000) 16,000 (3) (4,000) (150,000)
Retained earnings, 12/31 2,020,400 805,000 802,400 16,000 18,600 2,020,400
Balance Sheet
Investment in S Co. bonds 310,000 10,000 (1) -
300,000 (2)
Investment in S. Co. stock 1,424,400 64,400 (3) -
1,360,000 (4)
Other assets 5,420,000 2,620,000 8,040,000
Total assets 7,154,400 2,620,000 8,040,000
9% bonds payable 500,000 300,000 (2) 200,000
Discount on bonds payable (20,000) 12,000 (1) (8,000)
Other liabilities 2,134,000 335,000 2,469,000
Capital stock 3,000,000 1,000,000 1,000,000 (4) 3,000,000
Retained earnings 2,020,400 805,000 802,400 16,000 18,600 2,020,400
NCI in net assets 1/1 340,000 (4) 340,000 -
NCI in net assets 12/31 358,600 358,600
SlideTotal liab. & equity 7,154,400 2,620,000 2,102,400 2,102,400 8,040,000
9-22
Year Subsequent to Acquisition of Bonds, Entries on the
Books of Affiliated Companies—2013
P Company’s Books
Entries on June 30 and December 31
Cash 13,500
Interest Revenue 13,500
To record receipt of interest ($300,000 x 9% x 6/12).
Slide
9-23
LO 2 Allocating the constructive gain or loss.
Year Subsequent to Acquisition of Bonds, Entries on the
Books of Affiliated Companies—2013
S Company’s Books
Entries on June 30 and December 31
Slide
9-24
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper Entries
Slide
9-25
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper Entries
* ($12,000 x 80%)
** ($12,000 x 20%)
Slide
9-26
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper Entries
Slide
9-27
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper Entries
Slide
9-28
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper Entries
P S Eliminations Consolidated
Income Statement Company Company Debit Credit NCI Balances
Sales 3,546,000 2,020,000 5,566,000
Dividend income 48,000 48,000 (8) -
Interest income 24,500 27,000 (6) 2,500 (4) -
Total revenue 3,618,500 2,020,000 5,566,000
Cost of goods sold 2,040,000 1,200,000 3,240,000
Interest expense 50,000 3,000 (5) 20,000
27,000 (6)
Other expenses 1,124,500 630,000 1,754,500
Total cost and expense 3,164,500 1,880,000 5,014,500
Net income 454,000 140,000 551,500
Noncontrolling interest 28,600 (28,600)
Net income 454,000 140,000 75,000 32,500 28,600 522,900
Retained Earnings Statement
Retained earnings, 1/1 10,000 (2)
P Company 1,796,000 9,600 (3) 244,000 (1) 2,020,400
S Company 805,000 805,000 (9) -
Net income 454,000 140,000 75,000 32,500 28,600 522,900
Dividends declared (150,000) (60,000) 48,000 (1) (12,000) (150,000)
Retained earnings, 12/31 2,100,000 885,000 899,600 324,500 16,600 2,393,300
Balance Sheet
Investment in S Co. bonds 307,500 2,500 (4) 10,000 (2) -
300,000 (7)
Investment in S. Co. stock 1,200,000 244,000 (1) 1,444,000 (9) -
Other assets 5,812,500 2,690,000 8,502,500
Total assets 7,320,000 2,690,000 8,502,500
9% bonds payable 500,000 300,000 (7) 200,000
Discount on bonds payable (15,000) 3,000 (5) 12,000 (3) (6,000)
Other liabilities 2,220,000 320,000 2,540,000
Capital stock 3,000,000 1,000,000 1,000,000 (9) 3,000,000
Retained earnings 2,100,000 885,000 899,600 324,500 16,600 2,393,300
NCI in net assets 1/1 2,400 (3) 361,000 (9) 358,600 -
NCI in net assets 12/31 375,200 375,200
Slide
9-30 Total liab. & equity 7,320,000 2,690,000 2,451,500 2,451,500 8,502,500
Interim Purchase of Intercompany Bonds
Had the bonds been held during 2012, P Company would have
amortized a portion of the premium and S Company would have
amortized a part of the discount.
Assuming that P Company amortized $500 and S Company
amortized $600 during 2012, the original workpaper entries (2)
and (3) for constructive losses) are modified as follows:
Slide
9-32
Notes Receivable Discounted
P Company’s Books
Investment in S Co. preferred stock 180,000
Investment in S Co. Common Stock 1,160,000
Cash 1,340,000