Intercompany Bonds Issued to Affiliate

Transcription

1 1 - Topic Heading 2 Intercompany Bonds - Heading Chapter 5: INTERCOMPANY BONDS & LEASES Intercompany Bonds Issued to Affiliate 3 Intercompany Bonds Are Common 4 Issuer s Accrual Entry on Its Books Ps often provide financing for Ss Ps can borrow at better rates Ps want to control access to capital markets We do the same type of WS entries that we already talked about with intercompany debt Get Rid of Bond Rec/Bond Pay Get Rid of Int Rev/Int Exp Get Rid of Int Rec/Int Pay Assume S issues $100K of bonds & P buys bonds Assume that pay 8% interest: On S s books (Bond Issuer) in the 1 st Year: D. Cash $100,000 C. Bonds Payable $100,000 D. Interest Expense $8,000 C. Interest Payable $8,000 1

2 5 Issuer s Accrual Entry on Its Books 6 Issuer s Accrual Entry on Its Books Assume S issues $100K of bonds & P buys bonds Assume that Bonds pay 8% interest: On P s books (Bond Investor) in the 1 st Year: On S s books (Bond Issuer) in later years S accrues interest expense on intercompany bonds. D. Interest Expense $8,000 C. Interest Payable $8,000 D. Investment in Subsidiary Bonds $100,000 C. Cash $100,000 D. Interest Receivable $8,000 C. Interest Revenue $8,000 7 Issuer s Accrual Entry on Its Books 8 Intercompany Bonds Worksheet Entry - #2 On P s books (Bond Investor) in later years P accrues interest revenue on intercompany bonds. D. Interest Receivable $8,000 C. Interest Revenue $8,000 The WS entries are: B1 D. Bonds Payable $100,000 B1 C. Investment in Sub Bonds $100,000 B1 D. Interest Revenue $8,000 B1 C. Interest Expense $8,000 B2 D. Interest Payable $Amt Unpaid B2 C. Interest Receivable $Amt Unpaid 2

3 9 Intercompany Bonds - Heading 10 Creditor s Accrual Entry on Its Books Bonds Originally Issued to Others Purchased by Affiliate afterwards Bonds issued to non-affiliated buyers are legitimate debt Shows up on Consolidated FS If these bonds are later purchased by affiliated Cos They become intercompany debt No longer show up on Consolidated FS We treat bonds as being redeemed Bond issuer recognizes gain/loss on retirement 11 Creditor s Accrual Entry on Its Books 12 Creditor s Accrual Entry on Its Books When P buys S bonds on P s books: P creates Investment in Subsidiary Bonds for purchase price Purchase price includes de facto premium/discount No actual premium/discount acct is created by investor in bonds P amortizes defacto premium/discount P writes down/up Investment in Bonds account directly Assume P purchases S s $100K 8% bonds for $103,600 Premium amortized over 3 year remaining term In the 1st year: D. Investment in Bonds $103,600 C. Cash $103,600 D. Interest Receivable $8,000 C. Investment in Bonds $1,200 Interest Revenue $6,800 3

4 13 Issuer s Accrual Entry on Its Books On S s books (Bond Issuer) in the 1 st Year: D. Interest Expense $8,000 C. Interest Payable $8, Intercompany Bonds Worksheet Entry - #1 On the WS We want nothing to survive Get rid of Assets & Liabilities Get rid of Rev & Exp When you eliminate Rev & Exp There is a net reduction of exp = $1,200 ($8,000-6,800) This is income Who gets it? Issuer of bonds gets interest savings (income) = $1, Intercompany Bonds Worksheet Entry - #2 Also recognize loss/gain on retirement Difference between Price paid for bonds ($103,600) Issuer s BV ($100,000) Loss of $3,600 Issuer of Bonds (S) is allocated both: Loss/Gain from Retirement Interest savings/expenditure Over years, they offset & no effect 16 Intercompany Bonds Worksheet Entry - #2 In our E.g. following WS entry made in 1 st year: Remember, we are at the end of the 1 st year P amortized $1,200 of its Inv in Sub Bonds Amortization reduces Inv in Sub Bonds from $103,600 to $102,400 B1 D. Bonds Payable $100,000 B1 C. Investment in Subsidiary Bonds $102,400 B1 D. Interest Revenue $6,800 B1 C. Interest Expense $8,000 B1 D. Loss on Bond Retirement $3,600 4

5 17 Intercompany Bonds Worksheet Entry - #3 18 Intercompany Bonds Worksheet Entry - #4 If interest is unpaid eliminate interest receivable & payable: B2 D. Interest Payable $8,000 B2 C. Interest Receivable $8,000 Loss on bond retirement $3,600 Subsidiary Income Distribution Internally generated net income $12,000 Interest adjustment (bond prem.) $1,200 Adjusted income $9,600 NCI share 10% NCI $ Intercompany Bonds Worksheet Entry - #5 Parent Income Distribution Internally generated net income (including interest revenue) $36,800 90% of Sub's $9,600 income $8,640 Controlling Interest $45, Intercompany Bonds Worksheet Entry 2 nd Year - #1 Last year(1 st Year): Issuer (S) allocated $3,600 loss on retirement Issuer (S) allocated $1,200 interest savings Issuer (S) had a net loss of $2,400 ($3.600-$1,200) This reduced Consolidated RE by $2,400 last year Not done on P&S books must be done in WS ` This year (2 nd Year): P amortized its Inv in Sub Bonds by another $1,200 Reduced Inv in Sub Bonds from $102,400 to $101,200 B1 D. Bonds Payable $100,000 B1 C. Investment in Subsidiary Bonds $101,200 B1 D. Interest Revenue $6,800 B1 C. Interest Expense $8,000 B1 D. Retained Earnings, January 1, 2004, P(90%) $2,160 Retained Earnings, January 1, 2004, S(10%) $240 5

6 21 Intercompany Bonds Worksheet Entry 2 nd Year - #2 22 Intercompany Bonds Worksheet Entry 2 nd Year - #3 If interest is unpaid, need to eliminate intercompany accounts B2 D. Interest Payable $8,000 B2 C. Interest Receivable $8,000 Subsidiary Income Distribution Internally generated net income $12,000 Interest adjustment (bond prem.) $1,200 Adjusted income $13,200 NCI share 10% NCI $1, Intercompany Bonds Worksheet Entry 2 nd Year - #4 Parent Income Distribution Internally generated net income (including interest revenue) $36,800 90% of Sub's $13,200 income $11,700 Controlling Interest $48, Quick Review: In the B1 entry Get rid of Bonds Payable and Investment in Bonds Probably different numbers. Get rid of Interest Revenue and Interest Expense Probably different numbers. Amount you need to get entry to balance (the total differences from above) First year Gain/Loss Second year Issuer s RE 6

7 25 Other Intercompany Bond Issues - Heading 26 Part of Bond Issue Owned By Affiliates Other Intercompany Bond Topics Only Part of Bond Issue Owned by Affiliate If P purchased only portion of bond issue eliminate only portion purchased (along with its interest revenue & expense) Bonds owned by non-related parties are valid debt Not eliminated Interest accrued is valid expense 27 Effective Interest Amortization 28 Operating Leases - Heading If interest method of amortization (effective interest amortization) is used: Entries are unchanged, but Dollar amounts will be different Not on Midterm Operating Leases 7

8 29 Operating Leases - #1 30 Capital Leases - Heading If operating lease (OL) between affiliates eliminate: Rent revenue & Rent expense Rent receivable & Rent payable Assume $1,200 a month OL with 1 month unpaid rent: Capital Leases OL1 D. Rent Revenue $14,400 OL1 C. Rent Expense $14,400 OL2 D. Rent Payable $1,200 OL2 C. Rent Receivable $1, Capital Leases - #1 What about capital leases? Asset & liability are created on P&S books On Consolidated FS only asset survives Liability is intercompany liability Same as before: get rid of intercompany accts, int rev & exp, int pay & rec If profit taken in capital lease by affiliate Undo profit Names reflect capital leases Need to change names to reflect outright ownership of asset 32 Capital Leases - #2 Capital Lease with no profit On Lessee s books on lease signing: 1/1/20X1 D. Assets Under Capital Lease $5,851 C. Obligations Under Capital Lease $3,851 Cash $2,000 On Lessor s books on lease signing: 1/1/20X1 D. Minimum Lease Payments Receivable $5,000 Cash $2,000 C. Unearned Interest Revenue $1,149 Accounts Payable (Owed to 3 rd Party for asset) $5,851 8

9 33 If we were to close the year right after signing Capital Lease (e.g., you sign lease on 12/31/20x1): 34 Capital Leases - #3 Asset Under Capital Lease needs to have name changed LESSEE S BOOKS LESSOR S BOOKS Oblig Under Lease $3,851 Min Lease Pay Rec $5,000 Unearn Int Rev -1, To Property, Plant & Equipment D Property, Plant & Equipment 5,851 C Assets Under Capital Lease 5,851 D Unearned Interest Revenue 1,149 Obligations Under Capital Lease 3,851 C Minimum Lease Payments Receivable 5, EI Entry E.g., - #204 D Assets Under Capital Lease $5,851 Lessee Books C Obligations Under Capital Lease $3,851 C Cash 2,000 D Minimum Lease Payments Receivable 5,000 Lessor s Books Cash 2,000 C Unearned Interest Income $1,149 A/P (Owed to 3rd Party for asset) $5,851 D Unearned Interest Income 1,149 WS CL 2 Obligations Under Capital Lease 3,851 C Minimum Lease Payments Receivable 5,000 D Property, Plant & Equipment 5,851 WS CL 3 C Assets Under Capital Lease 5,851 After the WS entries Left with only asset ( Prop,Plnt & Equip ) Left with only liability ( Accts Pay ) 36 If the lease payment is made at the end of the year, then the succeeding years WS entries look like the above BUT, if the lease payment is not made at the end of the year, and Interest is accrued by the Lessee, then it gets complicated. THE PROBLEM COMES FROM THE ACCRUAL. 9

10 37 Capital Leases - #4 During 1 st year Int accrued & Depr Exp taken: On Lessee s books end of 1 st year : D. Depreciation Expense $1,170 C. Accumulated Depreciation Leased Asset $1,170 D. Interest Expense $616 C. Interest Payable $616 On Lessor s books: D. Unearned Interest Revenue $616 C. Interest Revenue $ Capital Leases Worksheet Entries - #1 WS needs to eliminate Revenue to Lender Interest Revenue Need to eliminate Expense to Borrower Interest Expense NO PROBLEM SO FAR. 1 st year WS entry: CL1 D. Interest Income $616 CL1 C. Interest Expense $616 Notice that there is no Int Receivable Instead, there is reduction in Unearned Int Rev 39 Capital Leases Worksheet Entries - #2 D. Interest Expense $616 C. Interest Payable $616 D. Unearned Interest Revenue $616 C. Interest Revenue $616 We want to eliminate the Interest Rec and Interest Pay The Yellow Accounts The PROBLEM is that THERE IS NO INTEREST RECEIVABLE Parent had Unearned Interest Revenue Parent reduced Unearned Interest Revenue to show that the Interest is owed Instead of creating Interest Receivable Reduced Unearned Interest Revenue It is now owed It isn t unearned any more 40 The Problem is that Unearned Interest Revenue goes with INTEREST PAYABLE D. Unearned Interest Revenue $616 C. Interest Revenue $616 D. Interest Expense $616 C. Interest Payable $616 Unearned Interest Revenue also goes with MIN LEASE PAYMENTS RECEIVABLE Minimum Lease Payments Receivable $5,000 Unearned Interest Revenue ($1149-$616) -533 $4,467 10

11 41 LESSEE S BOOKS LESSOR S BOOKS BEFORE: Oblig Under Lease $3,851 Min Lease Pay Rec $5,000 Unearn Int Revenue -1,149 $3,851 NOW: Oblig Under Lease $3,851 Min Lease Pay Rec $5,000 Unearn Int Revenue -533 Interest Payable $4, No Interest Receivable (Used Unearn Int Inc) $ What you have to remember is that Minimum Lease Payment Receivable is a RECEIVABLE It is a receivable for both the principal and the interest on the lease. When you debit Unearned Interest, you are increasing the Interest Receivable part of Minimum Lease Payment Receivable. Because there is a Interest Receivable part of Minimum Lease Payment Receivable, you include Interest Payable in the CL2 entry. 43 Capital Leases Worksheet Entries - #2 Start with the WS entry you did before Eliminate the Lease Payable & Receivable Use Updated Numbers For Unearned Interest ($1149-$616=$533): D Unearned Interest Revenue 533 Obligations Under Capital Lease 3,851 C Minimum Lease Payments Receivable 5,000 Then add Interest Payable: D Unearned Interest Revenue 533 Interest Payable 616 Obligations Under Capital Lease 3, LESSEE S BOOKS LESSOR S BOOKS Oblig Under Lease $3,851 Min Lease Pay Rec $5,000 Interest Payable 616 Unearn Int Inc -533 $4467 $4,467 No Interest Receivable CL2 D Unearned Interest Income 533 D Interest Payable 616 D Obligation Under Capital Lease 3,851 C Minimum Lease Payment Rec 5,000 C Minimum Lease Payments Receivable 5,000 11

12 45 Capital Leases Worksheet Entries - #3 In 1 st year also need to change name of asset from Asset Under Capital Lease to PP&E (you can t lease from yourself): CL3 D. Accumulated Depreciation -- Leased Asset $1,170 CL3 Cr. Accumulated Depreciation -- PP&E $1,170 CL3 D. Property Plant and Equipment $5,851 CL3 Cr. Assets Under Capital Lease $5, EI Entry E.g., - #204 LESSEE S BOOKS LESSOR S BOOKS D Assets Under Lease $5,851 D Min Lease Pay Rec $5,000 C Oblig Under Lease $3,851 D Cash 2,000 C Cash 2,000 C Unearn Int Inc $1,149 C A/P (3 rd Party) $5,851 D Depreciation Expense 1,170 D Unearned Int Rev 616 C Acc Depreciation 1,170 C Interest Rev 616 D Interest Expense 616 C Interest Payable 616 WORKSHEET ENTRIES D Interest Revenue 616 WS CL 1 C Interest Expense 616 D Unearned Interest Income 533 WS CL 2 D Interest Payable 616 D Obligation Under Capital Lease 3,851 C Minimum Lease Payment Rec 5,000 D Accumulated Depreciation Leased Asset 1,170 WS CL 3 C Accumulated Depreciation Prop, Plant & Equip 1,170 D Property, Plant & Equipment 5,851 WS CL 3 C Asset Under Capital Lease 5, Capital Leases Profit on Capital Lease - #1 Quick Review In the CL2 entry Get rid of Obligation Under Capital Lease, Minimum Lease Payment Receivable, and Unearned Interest Revenue. Then, also get rid of Interest Payable. NOT ON TEST If lessor has profit (sales type lease) Need to eliminate profit Lessor made following entry at signing of lease. All of the other journal entries of lessor and lessee do not change. 1/1/2001 D. Minimum Lease Payments Receivable $5,000 Cash $2,000 C. Unearned Interest Income $1,149 Accounts Payable (for asset) 4,951 Profit

13 49 Capital Leases Profit on Capital Lease - #2 50 Prior Transactions In addition to the other WS entries discussed earlier, must Write down asset s cost to original cost Defer profit on Capital Lease Eliminate depreciation exp on mark-up F1 D. Sales Profit on Lease $900 F1 C. Property, Plant and Equipment $900 F2 D. Accumulated Depreciation -- PP & E $300 F2 C. Depreciation Expense $300 Intercompany Transactions Prior To Business Combination If affiliates did business before becoming affiliated. Profits/losses and/or income/expenses accrued prior to affiliation stay in Consolidated FS Any profits/losses and/or income/expenses accrued after acquisition eliminated 13