CHAPTER 8 INTERCOMPANY INDEBTEDNESS

Transcription

1 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. There is also a premium or discount account to be eliminated when the bonds are not issued at par value. Unless 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 Both 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 reacquired by the debtor will be treated as retired. This 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. Moreover, although a purchase of debt of any of the other companies in the consolidated entity will not be recognized 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 The 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. Thus, it must be eliminated in the consolidation process. On 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. Neither company records the effect of the transaction on the economic entity. Thus, 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

2 Q8-7 When there has been a direct sale to an affiliate, the interest income recorded by the purchaser should equal the interest expense recorded by the seller and the two items should have no net effect on reported income. The 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. Because the full amount of the loss was recognized 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 The 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 unrecognized gain or loss at the end of the period. To 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. Consolidated net income will decrease by the amount of the loss. Because 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 equal 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 equal to the liability reported by the parent. 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. Consolidated 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. 8-2

3 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. Consolidated 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 On 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 recognized from a consolidated viewpoint. The difference between the sale price received by the parent and par value is a premium or discount. Each period there will be a need to establish the correct amount for the premium or discount account and to adjust interest expense recorded by the subsidiary to bring the reported amounts into conformity with the sale price to the nonaffiliate. Q8-18 The retirement gain or loss reported by the subsidiary when it repurchases the bonds held by the parent must be eliminated in the consolidation process. From 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 recognized at that point. 8-3

4 SOLUTIONS TO CASES C8-1 Recognition of Retirement Gains and Losses a. When Flood purchases the bonds it establishes an investment account on its books and Bradley establishes a bond liability and discount account on its books. No entry is made by Century. When Century purchases the bonds, Century records an investment and Flood removes the balance in the investment account and records a gain on the sale. Bradley makes no entry. When Bradley retires the issue, Bradley removes its liability and unamortized discount and records a loss on bond retirement. Century removes the bond investment account and records a loss on the sale of bonds. Flood makes no entry. b. A constructive loss on bond retirement is reported by the consolidated entity at the time Century purchases the bonds from Flood. The 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 Century. c. The initial sale of bonds by Bradley is treated as a normal transaction with no need for an adjustment 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 Century purchases the bonds from Flood. In the years before the bonds are retired by Bradley, income assigned to the noncontrolling interest (assuming no differential) will be greater than a pro rata portion of the reported net income of Bradley. In the period in which the bonds are retired by Bradley, reported net income of Bradley must be adjusted to remove its loss on bond retirement before assigning income to the noncontrolling interest. No adjustment is made in the years following the repurchase by Bradley. 8-4

5 C8-2 Borrowing by Variable Interest Entities MEMO To: President Hydro Corporation From: Re: Consolidation of Joint Venture, Accounting Staff Hydro Corporation and Rich Corner Bank established a joint venture which borrowed $30,000,000 and built a new production facility. That facility is now leased to Hydro on a 10-year operating lease. Hydro 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 joint venture. I have been asked to review the current financial reporting standards and determine whether Hydro s current reporting is appropriate. The circumstances surrounding the creation of the joint venture and the lease arrangement with Hydro appear to point to the need for Hydro to consolidate the joint venture with its own operations. Although Rich Corner Bank holds 100 percent of the equity of the joint venture, it has contributed less than 1 percent of the total assets of the joint venture ($200,000 of equity versus $30,000,000 of total borrowings). Under normal circumstances, less than a 10 percent investment in the entity s total assets is considered insufficient to permit the entity to finance its activities. [FIN 46R, Par 9; ASC ] In this situation, Hydro has guaranteed the $30,000,000 borrowed by the joint venture and has guaranteed a 20 percent annual return on the equity investment of Rich Corner Bank. These conditions will result in Hydro Corporation absorbing any losses incurred by the joint venture and establish Hydro Corporation as the primary beneficiary of the entity. The FASB requires consolidation by the entity that will absorb a majority of the entity s expected losses if they occur. [FIN 46R, Par. 14; ASC ] Consolidation of the joint venture will result in including the production facility among Hydro s assets and the debt as part of its long-term liabilities. The claim on the net assets of the joint venture held by Rich Corner Bank will be reported as part of noncontrolling interest. Hydro s 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 joint venture. Primary citation: FASB INT. 46 (ASC 810) 8-5

6 Case 8-3 Subsidiary Bond Holdings MEMO To: From: Re: Financial Vice-President Farflung Corporation, Accounting Staff Investment in Bonds Issued by Subsidiary The consolidated financial statements of Farflung Corporation should include both Micro Company and Eagle Corporation. The 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, Par. 1; ASC ] 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 Farflung s consolidated statements at December 31, 20X4, the following eliminating entry should have been included in the worksheet: Bonds Payable 400,000 Loss on Bond Retirement 24,000 Investment in Micro Company Bonds 424,000 The $24,000 loss should have been included in the consolidated income statement, leading to a reduction of $15,600 ($24,000 x 0.65) in income assigned to the controlling interest and a reduction of $8,400 ($24,000 x 0.35) in income assigned to noncontrolling shareholders. This error should be corrected by restating the financial statements of the consolidated entity for 20X4. 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 (1) the bonds had 15 years remaining until maturity when purchased by Eagle and pay 8 percent interest annually, (2) straight-line amortization of the premium paid by Eagle is appropriate, and (3) the consolidated financial statements as of December 31, 20X4, are corrected, the eliminating entry at December 31, 20X5, is: Bonds Payable 400,000 Interest Income 30,400(a) Investment in Micro Company 15,600 Noncontrolling Interest 8,400 Investment in Micro Company Bonds Interest Expense 422,400(b) 32,000(c) (a) ($400,000 x 0.08) - ($24,000/15 years) (b) $424,000 - ($24,000/15 years) (c) $400,000 x 0.08 Primary citation: ARB 51, Par. 6; ASC

7 C8-4 Interest Income and Expense a. Snerd apparently paid more than par value for the bonds and is amortizing the premium against interest income over the life of the bonds. Thus, the cash received is greater than the amount of interest income recorded. b. With the information given, the following appears to be true: (1) When purchasing the bonds, Snerd apparently paid less than the current carrying amount of the bonds on the subsidiary s books because a constructive gain on bond retirement is included in the 20X3 consolidated income statement. Since Snerd paid par value for the bonds, they must have been sold at a premium by the subsidiary. (2) Because 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. (3) Interest income recorded each period by Snerd 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. C8-5 Intercompany Debt Answers to this case can be found in the SEC Form 10-K filed by Hershey Foods 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. Hershey Foods and many other companies in the same situation hedge their intercompany receivables/payables through foreign currency forward contracts and swaps. b. Hershey's intercompany receivables/payables appear to come primarily from intercompany purchases and sales of goods. 8-7

8 SOLUTIONS TO EXERCISES E8-1 Bond Sale from Parent to Subsidiary a. Journal entries recorded by Humbolt Corporation: January 1, 20X2 Investment in Lamar Corporation Bonds 156,000 Cash 156,000 July 1, 20X2 Cash 4,500 Interest Income 4,200 Investment in Lamar Corporation Bonds 300 December 31, 20X2 Interest Receivable 4,500 Interest Income 4,200 Investment in Lamar Corporation Bonds 300 b. Journal entries recorded by Lamar Corporation: January 1, 20X2 Cash 156,000 Bonds Payable 150,000 Bond Premium 6,000 July 1, 20X2 Interest Expense 4,200 Bond Premium 300 Cash 4,500 December 31, 20X2 Interest Expense 4,200 Bond Premium 300 Interest Payable 4,500 c. Eliminating entries, December 31, 20X2: Bonds payable 150,000 Premium on Bonds Payable 5,400 Interest income 8,400 Investment in Lamar Corporation Bonds 155,400 Interest expense 8,400 Eliminate intercorporate bond holdings. Interest payable 4,500 Interest receivable 4,500 Eliminate intercompany receivable/payable. 8-8

9 E8-2 Computation of Transfer Price a. $105,000 = $100,000 par value + ($250 x 20 periods) premium b. $103,500 = $105,000 - ($250 x 6 periods) c. Eliminating entries: Bonds Payable 100,000 Bond Premium 3,500 Interest Income 11,500 Investment in Nettle Corporation Bonds 103,500 Interest Expense 11,500 Interest Payable 6,000 Interest Receivable 6,000 E8-3 Bond Sale at Discount a. $16,800 = [($600,000 x 0.08) + ($12,000 / 5 years)] x 1/3 b. Journal entries recorded by Wood Corporation: January 1, 20X4 Cash 16,000 Interest Receivable 16,000 July 1, 20X4 Cash 16,000 Investment in Carter Company Bonds 800 Interest Income 16,800 $800 = ($400,000 - $392,000)/(5 x 2) December 31, 20X4 Interest Receivable 16,000 Investment in Carter Company Bonds 800 Interest Income 16,800 c. Eliminating entries, December 31, 20X4: Bonds Payable 400,000 Interest Income 33,600 Investment in Carter Company Bonds 395,200 Bond Discount 4,800 Interest Expense 33,600 $33,600 = $16,000 + $16,000 + $800 + $800 $395,200 = $392,000 + ($800 x 4) $4,800 = $8,000 - ($800 x 4) Interest Payable 16,000 Interest Receivable 16,

10 E8-4 Evaluation of Intercorporate Bond Holdings a. The bonds were originally sold at a discount. Stellar purchased the bonds at par value and a constructive loss was reported. b. The annual interest payment received by Stellar 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 adjusted downward because the annual interest payment is less than is needed to issue the bonds at par value. c. In 20X6, consolidated net income was decreased as a result of the loss on constructive retirement of bonds. Each 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. Thus, consolidated net income for 20X7 will be increased. E8-5 Multiple-Choice Questions 1. a A constructive gain of $100,000 is included in consolidated net income for the period ended March 31, 20X8, and consolidated retained earnings at March 31, 20X8. Because the bonds of the parent are constructively retired, there is no effect on the amounts assigned to the noncontrolling interest. [AICPA Adapted] 2. a The loss on bond retirement will result in a reduction in consolidated retained earnings. [AICPA Adapted] 3. b $4,700 = ($50,000 x 0.10) - ($3,000 / 10 years) 4. a $4,000 = ($50,000 x 0.10) - ($8,000 / 8 years) 5. c $5,600 loss = $58,000 purchase price - [$53,000 - ($3,000 / 10 years) x 2 years] 6. c Operating income of Kruse Corporation $40,000 Net income of Gary's Ice Cream Parlors 20,000 $60,000 Less: Loss on bond retirement (5,600) Recognition during 20X6 ($4,700 - $4,000) 700 Consolidated net income $55,

11 E8-6 Multiple-Choice Questions 1. a $14,000 = [($300,000 x 0.09) - ($60,000 / 10 years)] x ($200,000 / $300,000) 2. c $12,000 = [$120,000 - ($20,000 / 10 years) x 2 years] - $104, b Net income of Solar Corporation $30,000 Unrecognized portion of gain on bond retirement ($12,000 - $1,500) 10,500 $40,500 Proportion of stock held by noncontrolling interest x.20 Income to noncontrolling interest $ 8,100 E8-7 Constructive Retirement at End of Year a. Eliminating entries, December 31, 20X5: Bonds Payable 400,000 Premium on Bonds Payable 9,000 Investment in Able Company Bonds 397,000 Gain on Bond Retirement 12,000 $9,000 = [($400,000 x 1.03) - $400,000] x 15/20 $12,000 = $9,000 + $400,000 - $397,000 Interest Payable 18,000 Interest Receivable 18,000 b. Eliminating entries, December 31, 20X6: Bonds Payable 400,000 Premium on Bonds Payable 8,400 Interest Income 36,200 Investment in Able Company Bonds 397,200 Interest Expense 35,400 Investment in Able Co. 7,200 NCI in NA of Able Co. 4,800 $8,400 = $9,000 - [$9,000 / (15 x 2)] x 2 $36,200 = $36,000 + [$3,000 / (15 x 2)] x 2 $397,200 = $397,000 + ($100 x 2) $35,400 = $36,000 - ($300 x 2) $7,200 = $12,000 x 0.60 $4,800 = $12,000 x 0.40 Interest Payable 18,000 Interest Receivable 18,

12 E8-8 Constructive Retirement at Beginning of Year a. Eliminating entries, December 31, 20X5: Bonds Payable 400,000 Premium on Bonds Payable 9,000 Interest Income 36,200 Investment in Able Company Bonds 397,000 Interest Expense 35,400 Gain on Bond Retirement 12,800 $9,000 = [($400,000 x 1.03) - $400,000] x 15/20 $36,200 = $36,000 +[($400,000 - $396,800)/(16 x 2)] x 2 $397,000 = $396,800 + ($100 x 2) $35,400 = $36,000 - ($300 x 2) $12,800 = [($400,000 x 1.03) - $400,000] x 16/20 + ($400,000 - $396,800) Interest Payable 18,000 Interest Receivable 18,000 b. Eliminating entries, December 31, 20X6: Bonds Payable 400,000 Premium on Bonds Payable 8,400 Interest Income 36,200 Investment in Able Company Bonds 397,200 Interest Expense 35,400 Investment in Able Co. 7,200 NCI in NA of Able Co. 4,800 Interest Payable 18,000 Interest Receivable 18,

13 E8-9 Retirement of Bonds Sold at a Discount Elimination of bond investment at December 31, 20X8: Bonds Payable 300,000 Interest Income 21,240 Loss on Constructive Bond Retirement 2,730 Investment in Farley Corporation Bonds 297,120 Interest Expense 21,450 Discount on Bonds Payable 5,400 Eliminate intercorporate bond holdings: $21,240 = $21,000 + [($300,000 - $296,880) / 13 years] $2,730 = $296,880 - $294,150 (computed below) $297,120 = $296,880 + [($300,000 - $296,880) / 13 years] $21,450 = $21,000 + ($9,000 / 20 years) $5,400 = ($9,000 / 20 years) x 12 years Computation of book value of liability at constructive retirement Sale price of bonds ($300,000 x 0.97) $291,000 Amortization of discount [($300,000 - $291,0000) / 20 years] x 7 years 3,150 Book value of liability at January 1, 20X8 $294,150 E8-10 Loss on Constructive Retirement Eliminating entries, December 31, 20X8: Bonds Payable 100,000 Interest Income 8,000 Loss on Bond Retirement 12,000 Investment in Apple Corporation Bonds 106,000 Discount on Bonds Payable 3,000 Interest Expense 11,000 Interest Payable 5,000 Interest Receivable 5,

14 E8-11 Determining the Amount of Retirement Gain or Loss a. Par value of bonds outstanding $200,000 Annual interest rate x.12 Interest payment $ 24,000 Amortization of bond premium ($15,000 x 2 bonds) / 5 years (6,000) Interest charge for full year $ 18,000 Less: Interest on bond purchased by Online Enterprises [($18,000 x 1/2) x (4 months / 12 months)] (3,000) Interest expense included in consolidated income statement $ 15,000 b. Sale price of bonds, January 1, 20X1 $115,000 Amortization of premium [($15,000 / 5) x 2 2/3 years] (8,000) Book value at time of purchase $107,000 Purchase price (100,000) Gain on bond retirement $ 7,000 c. Eliminating entries, December 31, 20X3: Bonds Payable 100,000 Bond Premium 6,000 Interest Income 4,000 Investment in Downlink Bonds 100,000 Interest Expense 3,000 Gain on Bond Retirement 7,000 Interest Payable 6,000 Interest Receivable 6,

15 E8-12 Evaluation of Bond Retirement a. No gain or loss will be reported by Bundle. b. A gain of $13,000 will be reported: Book value of liability reported by Bundle: Par value of bonds outstanding $200,000 Unamortized premium $8,000 - [($8,000 / 10 years) x 3.5 years] 5,200 Book value of debt $205,200 Amount paid by Parent (192,200) Gain on bond retirement $ 13,000 c. Consolidated net income for 20X6 will increase by $12,000: Gain on bond retirement $ 13,000 Adjustment for excess of interest income over interest expense: Interest income $(11,600) Interest expense 10,600 (1,000) Increase in consolidated net income $ 12,000 d. Eliminating entries, December 31, 20X6: Bonds Payable 200,000 Premium on Bonds Payable 4,800 Interest Income 11,600 Investment in Bundle Company Bonds 192,800 Interest Expense 10,600 Gain on Bond Retirement 13,000 Eliminate intercorporate bond holdings: $4,800 = ($8,000 / 10 years) x 6 years $11,600 = [$22,000 + ($7,800 / 6.5 years)] / 2 $192,800 = $192,200 + [($7,800 / 6.5 years) / 2] $10,600 = ($22,000 - $800) / 2 Interest Payable 11,000 Interest Receivable 11,000 Eliminate intercompany receivable/payable. 8-15

16 E8-12 (continued) e. Eliminating entries, December 31, 20X7: Bonds Payable 200,000 Premium on Bonds Payable 4,000 Interest Income 23,200 Investment in Bundle Company Bonds 194,000 Interest Expense 21,200 Investment in Bundle Co. 8,400 NCI in NA of Bundle Co. 3,600 Eliminate intercorporate bond holdings: $4,000 = ($8,000 / 10 years) x 5 years $23,200 = $22,000 + ($7,800 / 6.5 years) $194,000 = $192,800 + ($7,800 / 6.5 years) $21,200 = $22,000 - ($8,000 / 10 years) $8,400 = ($13,000 - $1,000) x 0.70 $3,600 = ($13,000 - $1,000) x 0.30 Interest Payable 11,000 Interest Receivable 11,000 Eliminate intercompany receivable/payable. f. Income assigned to noncontrolling interest in 20X7 is $14,400: Net income reported by Bundle $ 50,000 Adjustment for excess of interest income over interest expense: Interest income $(23,200) Interest expense 21,200 (2,000) Realized net income $ 48,000 Proportion of ownership held x.30 Income assigned to noncontrolling interest $ 14,

17 E8-13 Elimination of Intercorporate Bond Holdings a. Eliminating entries, December 31, 20X8: Bonds Payable 100,000 Premium on Bonds Payable 3,000 Interest Income 11,300 Constructive Loss on Bond Retirement 1,400 Investment in Stang Corporation Bonds 104,200 Interest Expense 11,500 Eliminate intercorporate bond holdings: $3,000 = $5,000 - ($500 x 4 years) $11,300 = $12,000 - ($4,900 / 7 years) $1,400 = $104,900 - ($105,000 - $1,500) $104,200 = $104,900 - ($4,900 / 7 years) $11,500 = $12,000 - ($5,000 / 10 years) Interest Payable 6,000 Interest Receivable 6,000 Eliminate intercompany receivable/payable. b. Income assigned to noncontrolling interest in 20X8 is $6,580: Net income reported by Stang Corporation $ 20,000 Constructive loss on bond retirement (1,400) Adjustment for excess of interest expense over interest income: Interest expense $11,500 Interest income (11,300) 200 Realized net income $ 18,800 Proportion of ownership held x 0.35 Income assigned to noncontrolling interest $ 6,580 c. Eliminating entries, December 31, 20X9: Bonds Payable 100,000 Premium on Bonds Payable 2,500 Interest Income 11,300 Investment in Stang Corp. 780 NCI in NA of Stang Corp. 420 Investment in Stang Corporation Bonds 103,500 Interest Expense 11,500 Eliminate intercorporate bond holdings: $2,500 = $3,000 - $500 $11,300 = $12,000 - ($4,900 / 7 years) $780 = ($1,400 - $200) x 0.65 $420 = ($1,400 - $200) x 0.35 $103,500 = $104,200 - $700 $11,500 = $12,000 - ($5,000 / 10 years) Interest Payable 6,000 Interest Receivable 6,000 Eliminate intercompany receivable/payable. 8-17

18 SOLUTIONS TO PROBLEMS P8-14 Consolidation Worksheet with Sale of Bonds to Subsidiary a. Entries recorded by Porter on its investment in Temple: Cash 6,000 Investment in Temple Corporation 6,000 Record dividends from Temple: $10,000 x 0.60 Investment in Temple Corporation 18,000 Income from Subsidiary 18,000 Record equity-method income: $30,000 x 0.60 b. Entry recorded by Porter on its bonds payable: Interest Expense 6,000 Bond Premium 400 Cash 6,400 Record interest payment: $400 = ($82,000 - $80,000) / 5 years c. Entry recorded by Temple on bond investment: Cash 6,400 Interest Income 6,000 Investment in Porter Company Bonds

19 P8-14 (continued) d. Book Value Calculations: NCI + Porter Co. = Common + Retained 40% 60% Stock Earnings Original book value 60,000 90, ,000 50,000 + Net Income 12,000 18,000 30,000 - Dividends (4,000) (6,000) (10,000) Ending book value 68, , ,000 70,000 Basic elimination entry Common stock 100,000 Retained earnings 50,000 Income from Temple Co. 18,000 NCI in NI of Temple Co. 12,000 Dividends declared 10,000 Investment in Temple Co. 102,000 NCI in NA of Temple Co. 68,000 Eliminate intercorporate bond holdings Bonds Payable 80,000 Bond Premium 1,200 Interest Income 6,000 Investment in Temple Co.'s Bonds 81,200 Interest Expense 6,

20 P8-14 (continued) e. Porter Temple Elimination Entries Co. Co. DR CR Consolidated Income Statement Sales 200, , ,000 Interest Income 6,000 6,000 Less: COGS (99,800) (61,000) (160,800) Less: Depreciation Expense (25,000) (15,000) (40,000) Less: Interest Expenses (6,000) (14,000) 6,000 (14,000) Income from Temple Co. 18,000 18,000 0 Consolidated Net Income 87,200 30,000 24,000 6,000 99,200 NCI in Net Income 12,000 (12,000) Controlling Interest in Net Income 87,200 30,000 36,000 6,000 87,200 Statement of Retained Earnings Beginning Balance 230,000 50,000 50, ,000 Net Income 87,200 30,000 36,000 6,000 87,200 Less: Dividends Declared (40,000) (10,000) 10,000 (40,000) Ending Balance 277,200 70,000 86,000 16, ,200 Balance Sheet Cash and Accounts Receivable 80,200 40, ,200 Inventory 120,000 65, ,000 Buildings & Equipment 500, , ,000 Less: Accumulated Depreciation (175,000) (75,000) (250,000) Investment in Porter Co.Bonds 81,200 81,200 Investment in Temple Co. 102, ,000 0 Total Assets 627, , , ,200 Accounts Payable 68,800 41, ,000 Bonds Payable 80, ,000 80, ,000 Bond Premium 1,200 1,200 Common Stock 200, , , ,000 Retained Earnings 277,200 70,000 86,000 16, ,200 NCI in NA of Temple Co. 68,000 68,000 Total Liabilities & Equity 627, , ,200 84, ,

21 P8-15 Consolidation Worksheet with Sale of Bonds to Parent a. Entries recorded by Mega Corporation on its investment in Tarp Company: Cash 18,000 Investment in Tarp Company Stock 18,000 Record dividends from Temple: $20,000 x 0.90 Investment in Tarp Company Stock 22,500 Income from Subsidiary 22,500 Record equity-method income: $25,000 x 0.90 b. Entry recorded by Mega Corporation on its investment in Tarp Company bonds: Cash 6,000 Interest Income 5,200 Investment in Tarp Company Bonds 800 Record interest payment: $800 = ($104,000 - $100,000) / 5 years c. Entry recorded by Tarp Company on its bonds payable: d. Book Value Calculations: Interest Expense 5,200 Bond Premium 800 Cash 6,000 Mega Corp. 90% NCI 10% + = Common Stock + Retained Earnings Original book value 13, ,000 80,000 50,000 + Net Income 2,500 22,500 25,000 - Dividends (2,000) (18,000) (20,000) Ending book value 13, ,500 80,000 55,000 Basic elimination entry Common stock 80,000 Retained earnings 50,000 Income from Tarp Co. 22,500 NCI in NI of Tarp Co. 2,500 Dividends declared 20,000 Investment in Tarp Co. 121,500 NCI in NA of Tarp Co. 13,500 Eliminate intercorporate bond holdings Bonds Payable 100,000 Bond Premium 1,600 Interest Income 5,200 Investment in Tarp Co.'s Bonds 101,600 Interest Expense 5,

22 P8-15 (continued) e. Mega Tarp Elimination Entries Corp. Co. DR CR Consolidated Income Statement Sales 140, , ,000 Interest Income 5,200 5,200 Less: COGS (86,000) (79,800) (165,800) Less: Depreciation Expense (20,000) (15,000) (35,000) Less: Interest Expenses (16,000) (5,200) 5,200 (16,000) Income from Tarp Co. 22,500 22,500 0 Consolidated Net Income 45,700 25,000 27,700 5,200 48,200 NCI in Net Income 2,500 (2,500) Controlling Interest in Net Income 45,700 25,000 30,200 5,200 45,700 Statement of Retained Earnings Beginning Balance 242,000 50,000 50, ,000 Net Income 45,700 25,000 30,200 5,200 45,700 Less: Dividends Declared (30,000) (20,000) 20,000 (30,000) Ending Balance 257,700 55,000 80,200 25, ,700 Balance Sheet Cash and Accounts Receivable 22,000 36,600 58,600 Inventory 165,000 75, ,000 Buildings & Equipment 400, , ,000 Less: Accumulated Depreciation (140,000) (80,000) (220,000) Investment in Tarp Co.Bonds 101, ,600 Investment in Tarp Co. 121, ,500 0 Total Assets 670, , , ,600 Current Payables 92,400 35, ,400 Bonds Payable 200, , , ,000 Bond Premium 1,600 1,600 Common Stock 120,000 80,000 80, ,000 Retained Earnings 257,700 55,000 80,200 25, ,700 NCI in NA of Tarp Co. 13,500 13,500 Total Liabilities & Equity 670, , ,800 38, ,

23 P8-16 Direct Sale of Bonds to Parent a. Journal entries recorded by Fern Corporation: January 1, 20X3 Cash 2,000 Interest Receivable 2,000 Receive interest on bond investment. July 1, 20X3 Cash 2,000 Investment in Vincent Company Bonds 250 Interest Income 2,250 Record receipt of bond interest: $250 = $5,000 / (10 years x 2) December 31, 20X3 Cash 7,000 Investment in Vincent Company Stock 7,000 Record dividends for Vincent: $7,000 = $10,000 x 0.70 Interest Receivable (Current Receivables) 2,000 Investment in Vincent Company Bonds 250 Interest Income 2,250 Accrue interest income at year-end. Investment in Vincent Company Stock 21,000 Income from Subsidiary 21,000 Record equity-method income: $21,000 = $30,000 x 0.70 Income from Vincent Co. 2,800 Investment in Vincent Company Stock 2,800 Record amortization of differential: $2,800 = ($56,000 / 14 years) x 0.70 b. Journal entries recorded by Vincent Company: January 1, 20X3 Interest Payable 4,000 Cash 4,000 Record interest payment: $4,000 = $100,000 x (.08 / 2) July 1, 20X3 Interest Expense 4,500 Discount on Bonds Payable 500 Cash 4,000 Semiannual payment of interest: $500 = $10,000 / 20 semiannual payments December 31, 20X3 Interest Expense 4,500 Discount on Bonds Payable 500 Interest Payable (Current Liabilities) 4,000 Accrue interest expense at year-end. 8-23

24 P8-16 (continued) c. Book Value Calculations: NCI Fern Corp. + = Common Retained + 30% 70% Stock Earnings Original book value 45, ,000 50, ,000 + Net Income 9,000 21,000 30,000 - Dividends (3,000) (7,000) (10,000) Ending book value 51, ,000 50, ,000 Basic elimination entry Common stock 50,000 Retained earnings 100,000 Income from Vincent Co. 21,000 NCI in NI of Vincent Co. 9,000 Dividends declared 10,000 Investment in Vincent Co. 119,000 NCI in NA of Vincent Co. 51,000 Excess Value (Differential) Calculations: NCI 30% + Fern Corp. 70% = Buildings and Equipment + Acc. Depr. Beg. balance 14,400 33,600 56,000 (8,000) Changes (1,200) (2,800) (4,000) Ending balance 13,200 30,800 56,000 (12,000) Amortized excess value reclassification entry: Depreciation expense 4,000 Income from Vincent Co. 2,800 NCI in NI of Vincent Co. 1,200 Excess value (differential) reclassification entry: Buildings and Equipment 56,000 Accumulated Depreciation 12,000 Investment in Vincent Co. 30,800 NCI in NA of Vincent Co. 13,200 Remove gain on land: Investment in Vincent Co. 5,600 NCI in NA of Vincent Co. 2,400 Land 8,000 Eliminate intercorporate bond holdings Bonds Payable 50,000 Interest Income 4,500 Investment in Vincent Bonds 46,500 Interest Expense 4,500 Discount on BP 3,500 Interest Payable 2,000 Interest Receivable 2,

25 P8-16 (continued) d. Fern Vincent Elimination Entries Corp. Co. DR CR Consolidated Income Statement Sales 300, , ,000 Interest income 4,500 4,500 0 Less: Other Expenses (198,500) (161,000) 4,000 (363,500) Less: Interest Expense (27,000) (9,000) 4,500 (31,500) Income from Vincent Co. 18,200 21,000 2,800 0 Consolidated Net Income 97,200 30,000 29,500 7, ,000 NCI in Net Income 9,000 1,200 (7,800) Controlling Interest in Net Income 97,200 30,000 38,500 8,500 97,200 Statement of Retained Earnings Beginning Balance 238, , , ,800 Net Income 97,200 30,000 38,500 8,500 97,200 Less: Dividends Declared (60,000) (10,000) 10,000 (60,000) Ending Balance 276, , ,500 18, ,000 Balance Sheet Cash & Current Receivables 30,300 46,000 2,000 74,300 Inventory 170,000 70, ,000 Land, Buildings, & Equipment (net) 320, ,000 56,000 12, ,000 8,000 Investment in Vincent Co. Stock 144,200 5, , ,800 Investment in Vincent Co. Bonds 46,500 46,500 0 Total Assets 711, ,000 61, , ,300 Current Liabilities 35,000 33,000 2,000 66,000 Bonds Payable 300, ,000 50, ,000 Discount on Bonds Payable (7,000) 3,500 (3,500) Common Stock 100,000 50,000 50, ,000 Retained Earnings 276, , ,500 18, ,000 NCI in NA of Vincent Co. 2,400 51,000 61,800 13,200 Total Liabilities & Equity 711, , ,900 86, ,

26 P8-17 Information Provided in Eliminating Entry a. Rupp Corporation is the parent company. In the eliminating entry, noncontrolling interest is credited with a portion of the constructive gain on bond retirement. b. Rupp holds 75 percent ownership of Gross [$4,200 / ($4,200 + $1,400)]. c. Amount paid to acquire bonds: Investment in Gross bonds, December 31, 20X7 $198,200 Amortization of discount following purchase [($200,000 - $198,200) / 3 years] x 2.5 years (1,500) Purchase price paid by Rupp $196,700 d. A gain of $7,700 was reported: Book value of liability reported by Gross: Par value of bonds outstanding $200,000 Unamortized premium $8,000 - [($8,000 / 10 years) x 4.5 years] 4,400 Book value of debt $204,400 Purchase price paid by Rupp (196,700) Gain on bond retirement $ 7,700 e. Consolidated net income for 20X7 after adjustment for bond retirement: Amount reported without adjustment $ 70,000 Adjustment for excess of interest income over interest expense: Interest income $(18,600) Income expense 17,200 (1,400) Consolidated net income $ 68,600 f. Income assigned to the noncontrolling interest will decrease by $350 ($1,400 x 0.25) as a result of the eliminating entry. g. Eliminating entry prepared at December 31, 20X8: Bonds Payable 200,000 Premium on Bonds Payable 1,600 Interest Income 18,600 Investment in Gross Corporation Bonds 198,800 Interest Expense 17,200 Investment in Gross Corp. 3,150 NCI in NA of Gross Corp. 1,050 Eliminate intercompany bond holdings: $1,600 = ($2,400 / 3 years) x 2 years $18,600 = ($200,000 x 0.09) + ($1,800 / 3 years) $198,800 = $198,200 + ($1,800 / 3 years) $17,200 = ($200,000 x 0.09) - ($2,400 / 3 years) $3,150 = [$7,700 - ($1,400 x 2.5 years)] x 0.75 $1,050 = [$7,700 - ($1,400 x 2.5 years)] x

27 P8-18 Prior Retirement of Bonds a. Amount paid by Amazing Corporation for bonds: Reported balance, December 31, 20X6 $102,400 Amortization of premium during 20X6 ($2,400 / 6 years) 400 Purchase price $102,800 b. Interest Expense 9,500 Discount on Bonds Payable 500 Cash 9,000 Annual payment of interest: $9,500 = [$9,000 + ($3,000 / 6 years)] c. Cash 9,000 Investment in Broadway Company Bonds 400 Interest Income 8,600 Annual receipt of interest: $8,600 = [$9,000 - ($2,400 / 6 years)] d. Bonds Payable 100,000 Loss on Bond Retirement 6,300 Investment in Broadway Company Bonds 102,800 Discount on Bonds Payable 3,500 Eliminate intercorporate bond holdings: $6,300 = $102,800 - [$97,000 -($3,000 / 6 years)] $102,800 = computed above $3,500 = [$3,000 + ($3,000 / 6 years)] e. Consolidated net Income and income to controlling interest for 20X5 and 20X6: 20X5 20X6 Operating income reported by Amazing $120,000 $150,000 Net income reported by Broadway 60,000 80,000 Loss on bond retirement (6,300) Adjustment for excess of interest expense ($9,500) over interest income ($8,600) 900 Consolidated net income $173,700 $230,900 Income to noncontrolling interest: ($60,000 - $6,300) x 0.15 (8,055) ($80,000 + $900) x 0.15 (12,135) Income to controlling interest $165,645 $218,

28 P8-19 Incomplete Data a. Purchase price of bonds: Balance reported in bond investment account in excess of par value, December 31, 20X4 ($109,000 - $100,000) $ 9,000 Amount amortized per year ($9,000 / 6 years) 1,500 Premium at date of purchase $ 10,500 Par value 100,000 Purchase price $110,500 b. Carrying amount of liability on date of purchase: Bond premium, December 31, 20X4 $ 6,000 Amount amortized per year ($6,000 / 6 years) 1,000 Bond premium, January 1, 20X4 $ 7,000 Par value 100,000 Carrying amount of liability, January 1, 20X4 $107,000 c. Income to noncontrolling interest in 20X5: Reported net income of Condor Company $ 30,000 Adjustment for excess of interest expense over interest income recorded in 20X5 500 $ 30,500 Proportion of stock held by noncontrolling interest x 0.30 Income assigned to noncontrolling interest $ 9,150 Excess of interest expense over interest income Interest expense: ($100,000 x 0.12) - ($10,000 / 10) $11,000 Interest income: ($100,000 x 0.12) ($10,500 / 7) (10,500) Excess $

29 P8-20 Balance Sheet Eliminations a. Book Value Calculations: Bath Corp. 80% NCI 20% + = Common Stock + Retained Earnings Original book value 41, , , ,000 + Net Income 15,000 60,000 75,000 - Dividends (2,000) (8,000) (10,000) Ending book value 54, , , ,000 Reversal/Deferred GP Calculations: Total = Bath Corp.'s share + NCI's share Downstream Deferred GP (12,000) (12,000) Upstream Deferred GP (6,000) (4,800) (1,200) Total (18,000) (16,800) (1,200) Basic elimination entry Common stock 100,000 Original amount invested (100%) Retained earnings 105,000 Beginning balance in retained earnings Income from Stang Co. 43,200 Bath s % of NI - Deferred GP + Reversal NCI in NI of Stang Co. 13,800 NCI share of NI - Deferred GP + Reversal Dividends declared 10, % of Stang Co.'s dividends declared Investment in Stang Co. 199,200 Net book value - Deferred GP + Reversal NCI in NA of Stang Co. 52,800 NCI share of BV - Deferred GP + Reversal 8-29

30 P8-20 (continued) 20X4 Downstream Transactions Total = Re-sold + Ending Inventory Sales 100,000 58,000 42,000 COGS 71,429 41,429 30,000 Gross Profit 28,571 16,571 12,000 Gross Profit % 28.57% 20X4 Upstream Transactions Total = Re-sold + Ending Inventory Sales 50,000 24,000 26,000 COGS 38,462 18,462 20,000 Gross Profit 11,538 5,538 6,000 Gross Profit % 23.08% Deferral of this year's unrealized profits on inventory transfers Sales 150,000 Cost of Goods Sold 132,000 Inventory 18,000 Bond and other Debt Elimination Entries: Bonds Payable 100,000 Bond Premium 12,000 Investment in Stang Bonds 101,500 Investment in Stang Stock 8,400 NCI in NA of Stang 2,100 Interest Payable 4,000 Interest Receivable 4,

31 P8-20 (continued) b. Bath Stang Elimination Entries Corp. Co. DR CR Consolidated Balance Sheet Cash and Receivables 122, ,000 4, ,500 Inventory 200, ,000 18, ,000 Buildings & Equipment (net) 320, , ,000 Investment in Stang Co. Bonds 101, ,500 0 Investment in Stang Co. Stock 207, , ,400 Total Assets 951, , ,100 1,254,500 Accounts Payable 40,000 28,000 4,000 64,000 Bonds Payable 400, , , ,000 Premium on Bonds Payable 36,000 12,000 24,000 Common Stock 200, , , ,000 Retained Earnings 311, , , ,600 43,200 13,800 10, , ,000 NCI in NA of Stang Co. 52,800 54,900 2,100 Total Liabilities & Equity 951, , , ,900 1,254,500 c. Bath Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X4 Cash and Receivables $ 242,500 Inventory 332,000 Buildings and Equipment (net) 680,000 Total Assets $1,254,500 Accounts Payable $ 64,000 Bonds Payable $600,000 Bond Premium 24, ,000 Stockholders Equity: Controlling Interest: Common Stock $200,000 Retained Earnings 311,600 Total Controlling interest $511,600 Noncontrolling Interest 54,900 Total Stockholders Equity 566,500 Total Liabilities and Stockholders Equity $1,254,

32 P8-21 Computations Relating to Bond Purchase from Nonaffiliate Note: We accidentally changed the Investment in Bliss Perfume Company Bonds instead of Investment in Bliss Perfume Company Stock when we converted the problem from the modified to the fully adjusted equity method. The following answer is based on the following corrected Investment in Bliss Perfume Company Bonds: $105,600 a. Balance reported, December 31, 20X4 $105,600 Amortization of premium during 20X4: Annual amortization ($5,600 / 7 years) $800 Portion of year held x 0.75 Amortized in 20X4 600 Purchase price of bonds $106,200 b. Carrying value of liability at date of acquisition: Carrying value at year-end $107,000 Premium amortized between date of purchase and December 31, 20X4 ($1,000 x 0.75) 750 Carrying value at acquisition $107,750 Purchase price (106,200) Gain on constructive retirement $ 1,550 c. Eliminating entries, December 31, 20X4: Bonds Payable 100,000 Bond Premium 7,000 Interest Income 6,900 Investment in Bliss Company Bonds 105,600 Interest Expense 6,750 Gain on Bond Retirement 1,550 Elimination of interest income: Interest income at nominal rate ($100,000 x 0.10) $10,000 Annual amortization of premium by Parsons (800) Annual interest income recorded by Parsons $ 9,200 Portion of year held by Parsons x 0.75 Interest income for 20X4 $ 6,900 Elimination of interest expense: Interest expense at nominal rate ($100,000 x 0.10) $10,000 Annual amortization of premium by Bliss ($10,000 / 10 years) (1,000) Annual interest expense recorded by Bliss $ 9,000 Portion of year held by Parsons x 0.75 Interest expense eliminated $ 6,750 Interest Payable 5,000 Interest Receivable 5,

33 P8-22 Computations following Parent's Acquisition of Subsidiary Bonds a. Book value of bonds purchased by Mainstream Corporation: Balance reported, December 31, 20X5 $111,250 Amortization of premium in 20X4 and 20X5 ($11,250 / 3 years) x 2 years 7,500 Balance at date of purchase $118,750 Proportion of bonds purchased by Mainstream x 0.40 Book value of bonds purchased $47,500 Amount paid by Mainstream to purchase bonds: Bond investment, December 31, 20X5 $42,400 Amortization of premium in 20X4 and 20X5 ($2,400 / 3 years) x 2 years 1,600 Purchase price (44,000) Gain on bond retirement $ 3,500 b. Income from Offenberg 560 Investment in Offenberg 560 Recognize 80% share of 1/5 of the constructive gain c. Bonds Payable 40,000 Bond Premium 4,500 Interest Income 3,200 Investment in Offenberg Company Bonds 42,400 Interest Expense 2,500 Investment in Offenberg 2,240 NCI in NA of Offenberg 560 Eliminate intercorporate bond holdings: $4,500 = $11,250 x 0.40 $3,200 = ($40,000 x 0.10) - $800 $2,500 = ($40,000 x 0.10) - ($3,750 x 0.40) $2,240 = ($3,500 - $700) x 0.80 $560 = ($3,500 - $700) x 0.20 d. Consolidated retained earnings $501,

34 P8-23 Consolidation Worksheet Year of Retirement a. Book Value Calculations: NCI 40% + Tyler Manufacturing 60% = Common Stock + Retained Earnings Original book value 60,000 90, ,000 50,000 + Net Income 12,000 18,000 30,000 - Dividends (4,000) (6,000) (10,000) Ending book value 68, , ,000 70,000 Reversal/Deferred GP Calculations: Total = Tyler s share + NCI's share Constructive Gain 7,000 4,200 2,800 Extra Depreciation Total 7,400 4,440 2,960 Basic elimination entry Common stock 100,000 Original amount invested (100%) Retained earnings 50,000 Beginning balance in retained earnings Income from Brown Corp. 22,440 Tyler s % of NI + Retirement Gain + Excess Depr. NCI in NI of Brown Corp. 14,960 NCI share of NI + Retirement Gain + Excess Depr. Dividends declared 10, % of Brown Corp.'s dividends declared Investment in Brown Corp. 106,440 Net book value + Retirement Gain + Excess Depr. NCI in NA of Brown Corp. 70,960 NCI share of BV + Retirement Gain + Excess Depr. Accumulated Equipment Depreciation Lofton Co. 30,000 Actual 4,000 10, ,600 Temple Corp. 40,000 "As If" 19,200 Eliminate the gain on Equipment and correct asset's basis: Investment in Temple Corp. 3,360 NCI in NA of Temple Corp. 2,240 Equipment 10,000 Accumulated Depreciation 15,600 Accumulated Depreciation 400 Depreciation Expense 400 Bond Elimination Entry: Bonds Payable 50,000 Bond Premium 7,000 Investment in Brown Bonds 50,000 Gain on Bond Retirement 7,

35 P8-23 (continued) Brown Elimination Entries Tyler Corp. DR CR Consolidated Income Statement Sales 400, , ,000 Gain on Bond Retirement 7,000 7,000 Less: Interest Expense (20,000) (20,000) (40,000) Less: Operating Expenses (302,200) (150,000) 400 (451,800) Income from Brown Corp. 22,440 22,440 0 Consolidated Net Income 100,240 30,000 22,440 7, ,200 NCI in Net Income 14,960 (14,960) Controlling Interest in Net Income 100,240 30,000 37,400 7, ,240 Statement of Retained Earnings Beginning Balance 146,640 50,000 50, ,640 Net Income 100,240 30,000 37,400 7, ,240 Less: Dividends Declared (40,000) (10,000) 10,000 (40,000) Ending Balance 206,880 70,000 87,400 17, ,880 Balance Sheet Cash 68,000 55, ,000 Accounts Receivable 100,000 75, ,000 Inventory 120, , ,000 Depreciable Assets (net) 360, , , ,800 10,000 Investment in Brown Corp. Bonds 50,000 50,000 0 Investment in Brown Corp. Stock 103,080 3, ,440 0 Total Assets 801, ,000 13, ,040 1,092,800 Accounts Payable 94,200 52, ,200 Bonds Payable 200, ,000 50, ,000 Bond Premium 28,000 7,000 21,000 Common Stock 300, , , ,000 Retained Earnings 206,880 70,000 87,400 17, ,880 NCI in NA of Brown Co. 2,240 70,960 68,720 Total Liab. & Equity 801, , ,640 88,360 1,092,

36 P8-23 (continued) b. Tyler Manufacturing and Subsidiary Consolidated Balance Sheet December 31, 20X3 Cash $ 123,000 Accounts Receivable 175,000 Inventory 230,000 Total Current Assets $ 528,000 Depreciable Assets (net) 564,800 Total Assets $1,092,800 Accounts Payable $ 146,200 Bonds Payable $350,000 Bond Premium 21, ,000 Stockholders Equity: Controlling Interest: Common Stock $300,000 Retained Earnings 206,880 Total Controlling Interest $506,880 Noncontrolling Interest 68,720 Total Stockholders Equity 575,600 Total Liabilities and Stockholders' Equity $1,092,800 Tyler Manufacturing and Subsidiary Consolidated Income Statement Year Ended December 31, 20X3 Sales $600,000 Gain on Bond Retirement 7,000 Total Revenue $607,000 Interest Expense $ 40,000 Operating Expenses 451,800 Total Expenses (491,800) Consolidated Net Income $115,200 Income to Noncontrolling Interest (14,960) Income to Controlling Interest $100,240 Tyler Manufacturing and Subsidiary Consolidated Statement of Retained Earnings Year Ended December 31, 20X3 Retained Earnings, January 1, 20X3 $146,640 Income to Controlling Interest, 20X3 100,240 $246,880 Dividends Declared, 20X3 (40,000) Retained Earnings, December 31, 20X3 $206,

37 P8-24 Consolidation Worksheet Year after Retirement a. Book Value Calculations: NCI 40% + Bennett Corp. 60% = Common Stock + Retained Earnings Original book value 68, , ,000 70,000 + Net Income 20,000 30,000 50,000 - Dividends (4,000) (6,000) (10,000) Ending book value 84, , , ,000 Basic elimination entry Common stock 100,000 Original amount invested (100%) Retained earnings 70,000 Beginning balance in retained earnings Income from Stone Cont. Co. 30,600 Bennett s % of NI + Amort. of loss NCI in NI of Stone Cont. Co. 20,400 NCI share of NI + Amort. of loss Dividends declared 10, % of Stone Cont. Co.'s dividends Investment in Stone Cont. Co. 126,600 Net book value + Amort. of loss NCI in NA of Stone Cont. Co. 84,400 NCI share of BV + Amort. of loss Income to Noncontrolling Interest: Reported net income of Stone $50,000 Amortization of loss on bond retirement: Carrying value of bond investment $106,000 Par value of debt 100,000) Unamortized premium paid by Bennett $ 6,000 Number of years until maturity 6* Amortization of premium annually 1,000 Realized net income of Stone Container $51,000 Proportion of stock held by noncontrolling interest x 0.40 Income to Noncontrolling Interest $20,400 * Stone s reported interest expense for $100,000 bonds $9,000 Bennett s reported interest income 8,000 Difference (amortization of premium) $1,000 Total premium 6,000 Yearly amortization 1,000 Years: 6 years 8-37

38 P8-24 (continued) Bond Elimination Entry: Bonds Payable 100,000 Investment in Stone Cont. Stock. 4,200 NCI in NA of Stone Cont. Co. 2,800 Interest Income 8,000 Investment in Stone Cont. Bonds 106,000 Interest Expense 9,000 Bennett Corp. Stone Cont. Elimination Entries Co. DR CR Consolidated Income Statement Sales 450, , ,000 Interest Income 8,000 8,000 0 Less: Interest Expense (20,000) (18,000) 9,000 (29,000) Less: Other Expenses (368,600) (182,000) (550,600) Income from Stone Cont. Co. 30,600 30,600 0 Consolidated Net Income 100,000 50,000 38,600 9, ,400 NCI in Net Income 20,400 (20,400) Controlling Interest in Net Income 100,000 50,000 59,000 9, ,000 Statement of Retained Earnings Beginning Balance 210,000 70,000 70, ,000 Net Income 100,000 50,000 59,000 9, ,000 Less: Dividends Declared (40,000) (10,000) 10,000 (40,000) Ending Balance 270, , ,000 19, ,000 Balance Sheet Cash 61,600 20,000 81,600 Accounts Receivable 100,000 80, ,000 Inventory 120, , ,000 Other Assets 340, , ,000 Investment in Stone Cont. Co. Bonds 106, ,000 0 Investment in Stone Cont. Co. Stock 122,400 4, ,600 0 Total Assets 850, ,000 4, ,600 1,081,600 Accounts Payable 80,000 50, ,000 Bonds Payable 200, , , ,000 Common Stock 300, , , ,000 Retained Earnings 270, , ,000 19, ,000 NCI in NA of Stone Cont. Co. 2,800 84,400 81,600 Total Liabilities & Equity 850, , , ,400 1,081,

39 P8-24 (continued) b. Bennett Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X4 Cash $ 81,600 Accounts Receivable 180,000 Inventory 230,000 Total Current Assets $ 491,600 Other Assets 590,000 Total Asset $1,081,600 Accounts Payable $ 130,000 Bonds Payable 300,000 Stockholders Equity: Controlling Interest: Common Stock $300,000 Retained Earnings 270,000 Total Controlling Interest $570,000 Noncontrolling Interest 81,600 Total Stockholders Equity 651,600 Total Liabilities and Stockholders Equity $1,081,600 Bennett Corporation and Subsidiary Consolidated Income Statement December 31, 20X4 Sales $700,000 Interest Expense $ 29,000 Other Expenses 550,600 Total Expenses (579,600) Consolidated Net Income $120,400 Income to Noncontrolling Interest (20,400) Income to Controlling Interest $100,000 Bennett Corporation and Subsidiary Consolidated Statement of Retained Earnings Year Ended December 31, 20X4 Retained Earnings, January 1, 20X4 $210,000 Income to Controlling Interest, 20X4 100,000 $310,000 Dividends Declared, 20X4 (40,000) Retained Earnings, December 31, 20X4 $270,

40 P8-25 Intercorporate Inventory and Debt Transfers a. Consolidated cost of goods sold for 20X7: Amount reported by Lance Corporation $620,000 Amount reported by Avery Company 240,000 Adjustment for unrealized profit in beginning inventory sold in 20X7 (15,000) Adjustment for inventory purchased from subsidiary and resold during 20X7: CGS recorded by Lance $40,000 CGS recorded by Avery ($60,000 - $27,000) 33,000 Total recorded $73,000 CGS based on Lance's cost [$40,000 x ($33,000 / $60,000)] (22,000) Required adjustment (51,000) Cost of goods sold $794,000 b. Consolidated inventory balance: Amount reported by Lance $167,000 Amount reported by Avery 120,000 Total inventory reported $287,000 Unrealized profit in ending inventory held by Avery [$20,000 x ($27,000 / $60,000)] (9,000) Consolidated balance $278,000 c. Entry to record interest expense for Avery Company: Interest Expense 15,200 Bond Premium 800 Cash 16,000 Computation of interest expense Par value of bonds issued $200,000 Stated interest rate x 0.08 Annual interest payment $ 16,000 Annual amortization of premium ($4,800 / 6 years) (800) Interest expense for 20X7 $ 15,

41 P8-25 (continued) d. Entry to record interest income for Lance Corporation: Cash 6,400 Investment in Avery Company Bonds 200 Interest Income 6,600 Computation of interest income Annual payment received ($80,000 x 0.08) $6,400 Amortization of discount [($80,000 - $78,400) / 8 years] 200 Interest income for 20X7 $6,600 e. Amount assigned to the noncontrolling interest Avery s Common Stock $50,000 Avery s Beginning RE 170,000 Avery s Net Income 48,000 Avery s Dividends (24,000) Constructive Gain 4,160 2 Years Amortization of Constructive Gain (1,040) Total $247,120 Proportion of ownership held by noncontrolling interest x 0.25 $61,780 Income assigned to noncontrolling interest: Net income reported by Avery Company $48,000 Adjustment for realization of profit on inventory sold to Lance in 20X6 15,000 Adjustment for realization of constructive gain on bond retirement ($4,160 / 8 years) (520) Realized net income of Avery for 20X7 $62,480 Proportion of ownership held by noncontrolling Interest x 0.25 Income assigned to noncontrolling interest $15,620 Computation of constructive gain on bond retirement Par value of bonds outstanding $200,000 Bond premium, December 31, 20X7 $4,800 Remaining years to maturity 6 Amortization per year $ 800 Years to maturity at purchase x 8 Premium, December 31, 20X5 6,400 Book value of bonds $206,400 Proportion purchased x 0.40 Book value of bonds purchased $ 82,560 Purchase price (78,400) Constructive gain $ 4,

42 P8-25 (continued) f. Book Value Calculations: Lance Corp. 75% NCI 25% + = Common Stock + Retained Earnings Original book value 55, ,000 50, ,000 + Net Income 12,000 36,000 48,000 - Dividends (6,000) (18,000) (24,000) Ending book value 61, ,000 50, ,000 Reversal/Deferred GP Calculations: Total = Lance Corp.'s share + NCI's share Upstream Reversal 15,000 11,250 3,750 Downstream Deferred GP (9,000) (9,000) Amortization of Constructive Gain (520) (390) (130) Total 5,480 1,860 3,620 Basic elimination entry Common stock 50,000 Original amount invested (100%) Retained earnings 170,000 Beginning balance in retained earnings Income from Avery Co. 37,860 Lance Corp. s % of NI + GP Reversal - Def. GP - Amort of Const. Gain NCI in NI of Avery Co. 15,620 NCI share of NI + GP Reversal - Amort of Const. Gain Dividends declared 24, % of Avery Co.'s dividends declared Investment in Avery Co. 184,860 Net book value + GP Reversal - Def. GP - Amort of Const. Gain NCI in NA of Avery Co. 64,620 NCI share of BV + GP Reversal - Amort of Const. Gain 20X6 Upstream Transactions Beginning Inventory Sales 59,000 COGS 44,000 Gross Profit 15,000 Reversal of last year's deferral: Investment in Avery Co. 11,250 NCI in NA of Avery Co. 3,750 Cost of Goods Sold 15,

43 P8-25 (continued) 20X7 Downstream Transactions Total = Re-sold + Ending Inventory Sales 60,000 33,000 27,000 COGS 40,000 22,000 18,000 Gross Profit 20,000 11,000 9,000 Gross Profit % 33.33% Deferral of this year's unrealized profits on inventory transfers Sales 60,000 Cost of Goods Sold 51,000 Inventory 9,000 Bond Elimination Entry: Bonds Payable 80,000 Bond Premium 1,920 Interest Income 6,600 Investment in Avery Co. Bonds 78,800 Interest Expense 6,080 Investment in Avery Co. Stock 2,730 NCI in NA of Avery Co. 910 $1,920 = ($3,200 / 10 years) x 6 years $6,600 = ($80,000 x 0.08) + ($1,600 / 8 years) $78,800 = $78,400 + [($1,600 / 8 years) x 2 years] $6,080 = ($80,000 x 0.08) - ($3,200 / 10 years) $2,730 = ($4,160 - $520) x 0.75 $910 = ($4,160 - $520) x

44 P8-25 (continued) g. Lance Avery Elimination Entries Corp. Co. DR CR Consolidated Income Statement Sales 750, ,000 60,000 1,010,000 Interest and Other Income 16,000 5,000 6,600 14,400 Less: COGS (620,000) (240,000) 15,000 (794,000) 51,000 Less: Depreciation Expense (45,000) (15,000) (60,000) Less: Interest and Other Expenses (35,000) (22,000) 6,080 (50,920) Income from Avery Co. 37,860 37,860 0 Consolidated Net Income 103,860 48, ,460 72, ,480 NCI in Net Income 15,620 (15,620) Controlling Interest in Net Income 103,860 48, ,080 72, ,860 Statement of Retained Earnings Beginning Balance 283, , , ,180 Net Income 103,860 48, ,080 72, ,860 Less: Dividends Declared (50,000) (24,000) 24,000 (50,000) Ending Balance 337, , ,080 96, ,040 Balance Sheet Cash 37,900 48,800 86,700 Accounts Receivable 110, , ,000 Other Receivables 30,000 15,000 45,000 Inventory 167, ,000 9, ,000 Land 90,000 40, ,000 Buildings & Equipment 500, , ,000 Less: Accumulated Depreciation (155,000) (75,000) (230,000) Investment in Avery Co. Bonds 78,800 78,800 0 Investment in Avery Co. Stock 176,340 11, , ,730 Total Assets 1,035, , ,000 1,274,700 Accounts Payable 118,000 35, ,000 Other Payables 40,000 20,000 60,000 Bonds Payable 250, ,000 80, ,000 Bond Premium 4,800 1,920 2,880 Common Stock 250,000 50,000 50, ,000 Additional Paid-in Capital 40,000 40,000 Retained Earnings 337, , ,080 96, ,040 NCI in NA of Avery Co. 3,750 64,620 61, Total Liabilities & Equity 1,035, , , ,700 1,274,

45 P8-26 Intercorporate Bond Holdings and Other Transfers a. Book Value Calculations: Pond Corp. 75% NCI 25% + = Common Stock + Retained Earnings Original book value 50, ,000 50, ,000 + Net Income 7,500 22,500 30,000 - Dividends (2,500) (7,500) (10,000) Ending book value 55, ,000 50, ,000 Reversal/Deferred GP Calculations: Total = Pond Corp.'s share + NCI's share Downstream Extra Depreciation 1,500 1,500 Amortization of Constr. Loss Total 2,100 1, Basic elimination entry Common stock 30,000 Original amount invested (100%) Additional Paid-in Capital 20,000 Original amount invested (100%) Retained earnings 150,000 Beginning balance in retained earnings Income from Skate Co. 24,450 Pond Corp. s % of NI + Extra Depr. + Amort. of Constr. Loss NCI in NI of Skate Co. 7,650 NCI share of NI + Amort. of Constr. Loss Dividends declared 10, % of Skate Co.'s dividends declared Investment in Skate Co. 166,950 Net book value + Extra Depr. + Amort. of Constr. Loss NCI in NA of Skate Co. 55,150 NCI share of BV + Amort. of Constr. Loss Accumulated Building Depreciation Skate Co. 65,000 Actual 6,500 60,000 1,500 75,000 Pond Corp. 125,000 As if 80,000 Eliminate the gain on building and correct asset's basis: Investment in Skate Co. 15,000 Building 60,000 Accumulated Depreciation 75,000 Accumulated Depreciation 1,500 Depreciation Expense 1,500 Eliminate the gain on land: Investment in Skate Co. 9,750 NCI in NA of Skate Co. 3,250 Land 13,

46 P8-26 (continued) Bond Elimination Entry: Bonds Payable 40,000 Interest Income 3,600 Investment in Skate Co. Stock 3,150 NCI in NA of Skate co. 1,050 Investment in Skate Co. Bonds 42,400 Interest Expense 4,200 Bond Discount 1,200 Debt Elimination Entry: Interest Payable 2,000 Interest Receivable 2,

47 P8-26 (continued) b. Pond Skate Elimination Entries Corp. Co. DR CR Consolidated Income Statement Sales 450, , ,000 Interest Income 18,500 3,600 14,900 Less: COGS (285,000) (136,000) (421,000) Less: Depreciation Expense (35,000) (24,000) 1,500 (57,500) Less: Other Operating Expenses (50,000) (40,000) (90,000) Less: Interest Expense (24,000) (10,500) 4,200 (30,300) Less: Miscellaneous Expense (11,900) (9,500) (21,400) Income from Skate Co. 24,450 24,450 0 Consolidated Net Income 87,050 30,000 28,050 5,700 94,700 NCI in Net Income 7,650 (7,650) Controlling Interest in NI 87,050 30,000 35,700 5,700 87,050 Statement of Retained Earnings Beginning Balance 222, , , ,500 Net Income 87,050 30,000 35,700 5,700 87,050 Less: Dividends Declared (30,000) (10,000) 10,000 (30,000) Ending Balance 279, , ,700 15, ,550 Balance Sheet Cash 53,100 47, ,100 Accounts Receivable 176,000 65, ,000 Interest and Other Receivables 45,000 10,000 2,000 53,000 Inventory 140,000 50, ,000 Land 50,000 22,000 13,000 59,000 Buildings & Equipment 400, ,000 60, ,000 Less: Accumulated Depreciation (185,000) (94,000) 1,500 75,000 (352,500) Investment in Skate Co. Stock 139,050 15, , ,750 3,150 Investment in Skate Co. Bonds 42,400 42,400 0 Investment in Tin Co. Bonds 134, ,000 Total Assets 994, ,000 89, ,350 1,124,600 Accounts Payable 65,000 11,000 76,000 Interest and Other Payables 45,000 12,000 2,000 55,000 Bonds Payable 300, ,000 40, ,000 Bond Discount (3,000) 1,200 (1,800) Common Stock 150,000 30,000 30, ,000 Additional Paid-in Capital 155,000 20,000 20, ,000 Retained Earnings 279, , ,700 15, ,550 NCI in NA of Skate Co. 3,250 55,150 50,850 1,050 Total Liabilities & Equity 994, , ,000 72,050 1,124,

48 P8-27A Comprehensive Multiple-Choice Questions (Modified Equity Method) 1. b $374,000 [$200,000 + $180, ($70,000 - $50,000)] 2. b $294,000 [$220,000 + $140,000 - $2,000 - ($70,000 - $6,000)] 3. a $7,400 [($100,000 x 0.09) - ($6,400 premium / 4 years)] 4. b $32,000 [$24,000 + ($16,000 / 2)] 5. b $13,125 ($293,125 - $200,000 - $50,000 - $30,000) 6. d $83,000 ($50,000 + $30,000 + $3,000) 7. b $3,000 Purchase price [$106,400 + ($6,400 / 4 years)] $108,000 Book value [$100,000 + $4,000 + ($4,000 / 4 years)] (105,000) Loss on bond retirement $ 3, a $4,620 Reported net income of Grange Corporation $40,000 Add: Inventory profits of prior period realized in 20X6 2,000 Less: Unrealized inventory profits of 20X6 (6,000) Less: Loss on bond retirement, January 1, 20X6 (3,000) Add: Interest differential in 20X6 600 Realized income of Grange $33,600 Less: Depreciation on differential assigned to buildings and equipment (3,000) Less: Impairment of goodwill (7,500) Adjusted income $23,100 Proportion of stock held by noncontrolling interest x 0.20 Income assigned to noncontrolling interest $ 4, d $68,645 Par value of shares outstanding $200,000 Retained earnings, December 31, 20X6 125,000 Less: Unrealized inventory profit (6,000) Unrecorded portion of bond retirement loss ($3,000 - $600) (2,400) Add: Unamortized differential assigned to buildings and equipment ($30,000 - $9,000) 21,000 Unimpaired goodwill ($13,125 - $7,500) 5,625 $343,225 Proportion of stock held by noncontrolling interest x 0.20 Assigned to noncontrolling interest $ 68, b $5,625 ($13,125 - $7,500) 8-48

49 P8-28 Comprehensive Problem: Intercorporate Transfers a. Goodwill as of January 1, 20X7: Fair value of consideration given by Topp $1,152,000 Fair value of noncontrolling interest at acquisition 128,000 Total $1,280,000 Book value of net assets at acquisition (1,200,000) Differential at acquisition $ 80,000 Increase in fair value of land (30,000) Goodwill at acquisition $ 50,000 b. Computation of balance in investment account, January 1, 20X7: Bussman stockholders' equity, January 1, 20X7: Common stock $ 500,000 Premium on common stock 280,000 Retained earnings 470,000 Stockholders' equity, January 1, 20X7 $1,250,000 Topp's ownership share x 0.90 Book value of shares held by Topp $1,125,000 Differential at January 1, 20X7 ($80,000 x 0.90) 72,000 Inventory sale deferred gross profit ($4,500 x 0.90) (4,050) Balance in Investment in Bussman Stock account, January 1, 20X7 $1,192,950 Working backwards: Ending Balance $1,239,840 - Net Income ($100,000 x 0.90) (90,000) + Dividends ($40,000 x 0.90) 36,000 - Reversal of 20X6 deferred gross profit ($4,500 x 0.90) (4,050) + 20X7 gross profit deferral ($5,400 x 0.90) 4,860 + Impairment loss ($25,000 x 0.90) 22,500 - Bond retirement gain ($24,000 x 0.90) (21,600) + Retirement gain amortization ($6,000 x 0.90) 5,400 Total $ 1,192,950 c. Gain on constructive retirement of Bussman's bonds: Original proceeds from issuance of Bussman bonds $1,010,000 Premium amortized to January 2, 20X7: ($10,000 / 10) x 6 (6,000) Book value of bonds at constructive retirement $1,004,000 Price paid for Bussman bonds by Topp (980,000) Gain on constructive retirement of Bussman's bonds $ 24,

50 d. Income to noncontrolling interest, 20X7: Bussman's 20X7 net income $100,000 Add: 20X6 intercompany profit realized in 20X7 4,500 Constructive gain on retirement of bonds 24,000 Less: Unrealized intercompany profit on 20X7 transfer (5,400) Portion of constructive gain on bond retirement recognized currently by separate affiliates ($24,000 / 4 years) (6,000) Impairment of goodwill (25,000) Subsidiary income to be apportioned $ 92,100 Noncontrolling interest's proportionate share x 0.10 Income to noncontrolling interest $ 9,210 e. Total noncontrolling interest, December 31, 20X6: Bussman's stockholders' equity, December 31, 20X6 $1,250,000 Unrealized profit on intercompany sale of inventory (4,500) Bussman's realized equity, December 31, 20X6 $1,245,500 Differential assigned to land 30,000 Differential assigned to goodwill 50,000 $1,325,500 Noncontrolling interest's proportionate share x 0.10 Total noncontrolling interest, December 31, 20X6 $ 132,

51 P8-28 (continued) f. elimination entries Book Value Calculations: NCI 10% + Topp Co. 90% = Common Stock + Premium on Common Stock + Retained Earnings Original Book Value 125,000 1,125, , , ,000 + Net Income 10,000 90, ,000 - Dividends (4,000) (36,000) (40,000) Ending Book Value 131,000 1,179, , , ,000 Deferred Gain Calculations: Total = Topp Co.'s Share + NCI's share Inventory 20X6 Reversal 4,500 4, Inventory 20X7 Def. GP (5,400) (4,860) (540) Bond Retirement Gain 24,000 21,600 2,400 Amortization of Retirement Gain (6,000) (5,400) (600) Total 17,100 15,390 1,710 Basic elimination entry: Common Stock 500,000 Original amount invested (100%) Premium on Common Stock 280,000 Beginning balance in premium on common stock Retained Earnings 470,000 Beginning balance in retained earnings Income from Bussman Corp. 105,390 Topp's % of NI - Deferred GP + Reversal + Gain - Amort of Gain NCI in NI of Bussman Corp. 11,710 NCI share of NI - Deferred GP + Reversal + Gain - Amort of Gain Dividends declared 40, % of Bussman Corp.'s dividends declared Investment in Bussman Corp. 1,194,390 Net book value - Deferred GP + Reversal + Gain - Amort of Gain NCI in NA of Bussman Corp. 132,710 NCI share of BV - Deferred GP + Reversal + Gain - Amort of Gain 8-51

52 Excess Value (Differential) Calculations: NCI 10% + Topp Co. 90% = Land + Goodwill Beginning balance 8,000 72,000 30,000 50,000 Changes (2,500) (22,500) (25,000) Ending balance 5,500 49,500 30,000 25,000 Amortized excess value reclassification entry: Goodwill Impairment Loss 25,000 Income from Bussman Corp. 22,500 NCI in NI of Bussman Corp. 2,500 Excess value (differential) reclassification entry: Land 30,000 Goodwill 25,000 Investment in Bussman Corp. 49,500 NCI in NA of Bussman Corp. 5,

53 P8-28 (continued) 20X6 Upstream Transactions Total = Re-sold + Ending Inventory Sales 64,000 49,000 15,000 COGS 44,800 34,300 10,500 Gross Profit 19,200 14,700 4,500 Gross Profit % 30.00% 20X7 Upstream Transactions Total = Re-sold + Ending Inventory Sales 78,000 60,000 18,000 COGS 54,600 42,000 12,600 Gross Profit 23,400 18,000 5,400 Gross Profit % 30.00% Reversal of last year's deferral: Investment in Bussman Corp. 4,050 NCI in NA of Bussman Corp. 450 Cost of Goods Sold 4,500 Deferral of 20X7 unrealized profits on inventory transfers Sales 78,000 Cost of Goods Sold 72,600 Inventory 5,400 Eliminate intercompany of Topp's bonds: Bonds Payable 200,000 Investment in Topp Bonds 200,000 Eliminate intercompany interest Other Income 20,000 Other Expenses 20,000 ($200,000 x 0.10) Eliminate accrued interest on intercompany bonds: Current Payables 5,000 Current Receivables 5,000 ($200,000 x 0.10) x 1/4 year Eliminate intercompany holding of Bussman bonds: Bonds Payable 1,000,000 Premium on Bonds Payable 3,000 Other Income (Interest) 125,000 Investment in Bussman Bonds 985,000 Gain on Retirement of Bonds 24,000 Other Expenses (Interest) 119,000 $125,000 = ($1,000,0000 x 0.12) + $5,000 $24,000 = $1,004,000 - $980,000 $119,000 = ($1,000,000 x 0.12) - $1,000 Eliminate intercompany dividend payable/receivable: Current Payables 9,000 Current Receivables 9,

54 P8-28 (continued) g. Bussman Elimination Entries Topp Corp. DR CR Consolidated Income Statement Sales 3,101, ,000 78,000 3,813,000 Other Income 135,000 31, ,000 21,000 20,000 Less: COGS (2,009,000) (430,000) 4,500 (2,361,900) 72,600 Less: Depr. and Amort. Expense (195,000) (85,000) (280,000) Less: Other Expenses (643,000) (206,000) 119,000 (710,000) 20,000 Goodwill Impairment Loss 25,000 (25,000) Gain on Bond Retirement 24,000 24,000 Income from Bussman Corp. 82, ,390 22,500 0 Consolidated Net Income 471, , , , ,100 NCI in Net Income 11,710 2,500 (9,210) Controlling Interest in NI 471, , , , ,890 Statement of Retained Earnings Beginning Balance 3,028, , ,000 3,028,950 Net Income 471, , , , ,890 Less: Dividends Declared (50,000) (40,000) 40,000 (50,000) Ending Balance 3,450, , , ,100 3,450,840 Balance Sheet Cash 39,500 29,000 68,500 Current Receivables 112,500 85,100 5, ,600 9,000 Inventory 301, ,900 5, ,500 Land 1,231, ,000 30,000 1,774,000 Buildings & Equipment 2,750,000 1,835,000 4,585,000 Less: Accumulated Depreciation (1,210,000) (619,000) (1,829,000) Investment in Bussman Corp. Stock 1,239,840 4,050 1,194, ,500 Investment in Bussman Corp. Bonds 985, ,000 0 Investment in Topp Bonds 200, ,000 0 Goodwill 25,000 25,000 Total Assets 5,448,840 2,392,000 59,050 2,448,290 5,451,600 Current Payables 98,000 79,000 5, ,000 9,000 Bonds Payable 200,000 1,000,000 1,000, ,000 Premium on Bonds Payable 3,000 3,000 Common Stock 1,000, , ,000 1,000,000 Premium on Common Stock 700, , , ,000 Retained Earnings 3,450, , , ,100 3,450,840 NCI in NA of Bussman Corp , ,760 5,500 Total Liabilities & Equity 5,448,840 2,392,000 2,832, ,310 5,451,

55 P8-29A Comprehensive Problem: Intercorporate Transfers (Modified Equity Method) a. Goodwill as of January 1, 20X7: Fair value of consideration given by Topp $1,152,000 Fair value of noncontrolling interest at acquisition 128,000 Total $1,280,000 Book value of net assets at acquisition (1,200,000) Differential at acquisition $ 80,000 Increase in fair value of land (30,000) Goodwill at acquisition $ 50,000 b. Computation of balance in investment account, January 1, 20X7: Bussman stockholders' equity, January 1, 20X7: Common stock $ 500,000 Premium on common stock 280,000 Retained earnings 470,000 Stockholders' equity, January 1, 20X7 $1,250,000 Topp's ownership share x 0.90 Book value of shares held by Topp $1,125,000 Differential at January 1, 20X7 ($80,000 x 0.90) 72,000 Balance in Investment in Bussman Stock account, January 1, 20X7 $1,197,000 Computation of balance in investment account, December 31, 20X7: (not required) Balance in Investment in Bussman Stock account, January 1, 20X7 $1,197,000 Add: Income from subsidiary, 20X7 90,000 Less: Dividends received ($40,000 x 0.90) (36,000) Balance in Investment in Bussman Stock account, December 31, 20X7 $1,251,000 c. Gain on constructive retirement of Bussman's bonds: Original proceeds from issuance of Bussman bonds $1,010,000 Premium amortized to January 2, 20X7: ($10,000 / 10) x 6 (6,000) Book value of bonds at constructive retirement $1,004,000 Price paid for Bussman bonds by Topp (980,000) Gain on constructive retirement of Bussman's bonds $ 24,

56 P8-29A (continued) d. Income to noncontrolling interest, 20X7: Bussman's 20X7 net income $100,000 Add: 20X6 intercompany profit realized in 20X7 4,500 Constructive gain on retirement of bonds 24,000 Less: Unrealized intercompany profit on 20X7 transfer (5,400) Portion of constructive gain on bond retirement recognized currently by separate affiliates ($24,000 / 4 years) (6,000) Impairment of goodwill (25,000) Subsidiary income to be apportioned $ 92,100 Noncontrolling interest's proportionate share x 0.10 Income to noncontrolling interest $ 9,210 e. Total noncontrolling interest, December 31, 20X6: Bussman's stockholders' equity, December 31, 20X6 $1,250,000 Unrealized profit on intercompany sale of inventory (4,500) Bussman's realized equity, December 31, 20X6 $1,245,500 Differential assigned to land 30,000 Differential assigned to goodwill 50,000 $1,325,500 Noncontrolling interest's proportionate share x 0.10 Total noncontrolling interest, December 31, 20X6 $ 132,

57 P8-29A (continued) f. Elimination entries: Book Value Calculations: NCI 10% + Topp Co. 90% = Common Stock + Premium on Common Stock + Retained Earnings Original Book Value 125,000 1,125, , , ,000 + Net Income 10,000 90, ,000 - Dividends (4,000) (36,000) (40,000) Ending Book Value 131,000 1,179, , , ,000 Deferred Gain Calculations: Total = Topp Co.'s Share + NCI's share Inventory 20X6 Reversal 4,500 4, Inventory 20X7 Def. GP (5,400) (4,860) (540) Bond Retirement Gain 24,000 21,600 2,400 Amortization of Retirement Gain (6,000) (5,400) (600) Total 17,100 15,390 1,710 Basic elimination entry: Common Stock 500,000 Original amount invested (100%) Premium on Common Stock 280,000 Beginning balance in premium on common stock Retained Earnings 470,000 Beginning balance in retained earnings Income from Bussman Corp. 90,000 Topp's % of NI NCI in NI of Bussman Corp. 11,710 NCI share of NI - Deferred GP + Reversal + Gain - Amort of Gain Dividends declared 40, % of Bussman Corp.'s dividends declared Investment in Bussman Corp. 1,179,000 Net book value NCI in NA of Bussman Corp. 132,710 NCI share of BV - Deferred GP + Reversal + Gain - Amort of Gain Excess value (differential) reclassification entry: Land 30,000 Goodwill 50,000 Investment in Bussman Corp. 72,000 NCI in NA of Bussman Corp. 8,000 Impairment Loss Goodwill Impairment Loss 25,000 Goodwill 25,000 NCI's portion of impairment loss NCI in NA of Bussman Corp. 2,500 NCI in NI of Bussman Corp. 2,

58 P8-29A (continued) 20X6 Upstream Transactions Total = Re-sold + Ending Inventory Sales 64,000 49,000 15,000 COGS 44,800 34,300 10,500 Gross Profit 19,200 14,700 4,500 Gross Profit % 30.00% 20X7 Upstream Transactions Total = Re-sold + Ending Inventory Sales 78,000 60,000 18,000 COGS 54,600 42,000 12,600 Gross Profit 23,400 18,000 5,400 Gross Profit % 30.00% Reversal of last year's deferral: Retained Earnings 4,050 NCI in NA of Bussman Corp. 450 Cost of Goods Sold 4,500 Deferral of 20X7 unrealized profits on inventory transfers Sales 78,000 Cost of Goods Sold 72,600 Inventory 5,400 Eliminate intercompany of Topp's bonds: Bonds Payable 200,000 Investment in Topp Bonds 200,000 Eliminate intercompany interest Other Income 20,000 Other Expenses 20,000 ($200,000 x 0.10) Eliminate accrued interest on intercompany bonds: Current Payables 5,000 Current Receivables 5,000 ($200,000 x 0.10) x 1/4 year Eliminate intercompany holding of Bussman bonds: Bonds Payable 1,000,000 Premium on Bonds Payable 3,000 Other Income (Interest) 125,000 Investment in Bussman Bonds 985,000 Gain on Retirement of Bonds 24,000 Other Expenses (Interest) 119,000 $125,000 = ($1,000,0000 x 0.12) + $5,000 $24,000 = $1,004,000 - $980,000 $119,000 = ($1,000,000 x 0.12) - $1,000 Eliminate intercompany dividend payable/receivable: Current Payables 9,000 Current Receivables 9,

59 P8-29A (continued) Bussman Elimination Entries Topp Corp. DR CR Consolidated Income Statement Sales 3,101, ,000 78,000 3,813,000 Other Income 135,000 31, ,000 21,000 20,000 Less: COGS (2,009,000) (430,000) 4,500 (2,361,900) 72,600 Less: Depr. and Amort. Expense (195,000) (85,000) (280,000) Less: Other Expenses (643,000) (206,000) 119,000 (710,000) 20,000 Goodwill Impairment Loss 25,000 (25,000) Gain on Bond Retirement 24,000 24,000 Income from Bussman Corp. 90,000 90,000 0 Consolidated Net Income 479, , , , ,100 NCI in Net Income 11,710 2,500 (9,210) Controlling Interest in NI 479, , , , ,890 Statement of Retained Earnings Beginning Balance 3,033, , ,000 3,028,950 4,050 Net Income 479, , , , ,890 Less: Dividends Declared (50,000) (40,000) 40,000 (50,000) Ending Balance 3,462, , , ,600 3,450,840 Balance Sheet Cash 39,500 29,000 68,500 Current Receivables 112,500 85,100 5, ,600 9,000 Inventory 301, ,900 5, ,500 Land 1,231, ,000 30,000 1,774,000 Buildings & Equipment 2,750,000 1,835,000 4,585,000 Less: Accumulated Depreciation (1,210,000) (619,000) (1,829,000) Investment in Bussman Corp. Stock 1,251,000 1,179, ,000 Investment in Bussman Corp. Bonds 985, ,000 0 Investment in Topp Bonds 200, ,000 0 Goodwill 50,000 25,000 25,000 Total Assets 5,460,000 2,392,000 80,000 2,480,400 5,451,600 Current Payables 98,000 79,000 5, ,000 9,000 Bonds Payable 200,000 1,000,000 1,000, ,000 Premium on Bonds Payable 3,000 3,000 Common Stock 1,000, , ,000 1,000,000 Premium on Common Stock 700, , , ,000 Retained Earnings 3,462, , , ,600 3,450,840 NCI in NA of Bussman Corp , ,760 2,500 8,000 Total Liabilities & Equity 5,460,000 2,392,000 2,823, ,310 5,451,

60 P8-30A Cost Method (This problem was incorrectly listed as P8-29A) a. Journal entry recorded by Bennet Corporation: Cash 6,000 Dividend Income 6,000 Record dividend from Stone Container: $10,000 x 0.60 b. Eliminating entries, December 31, 20X4: Basic elimination entry Common stock 100,000 Retained earnings 25,000 Investment in Stone Cont. Co. 75,000 NCI in NA of Stone Cont. Co. 50,000 Dividend elimination entry: Dividend Income 6,000 NCI in NI of Stone Cont. Co. 4,000 Dividend declared 10,000 Assign undistributed income to NCI NCI in NI of Stone Cont. Co. 16,400 Retained Earnings 18,000 NCI in NA of Stone Cont. Co. 34,400 Bond Elimination Entry: Bonds Payable 100,000 Retained Earnings 4,200 NCI in NA of Stone Cont. Co. 2,800 Interest Income 8,000 Investment in Stone Cont. Bonds 106,000 Interest Expense 9,000 Computation of 20X3 constructive loss on bond retirement Bennett's Bond investment, December 31, 20X4 $106,000 Amortization of premium in 20X4: Interest income based on par value $9,000 Interest income recorded by Bennett (8,000) Amortization of premium 1,000 Purchase price paid by Bennett, December 31, 20X3 $107,000 Bond liability reported by Stone Container, December 31, 20X3 (100,000) Constructive loss on bond retirement $ 7,

61 P8-29A (continued) c. Bennett Corp. Stone Elimination Entries Cont. Co. DR CR Consolidated Income Statement Sales 450, , ,000 Interest Income 8,000 8,000 0 Less: Interest Expense (20,000) (18,000) 9,000 (29,000) Less: Other Expenses (368,600) (182,000) (550,600) Dividend Income 6,000 6,000 0 Consolidated Net Income 75,400 50,000 14,000 9, ,400 NCI in Net Income 4,000 (20,400) 16,400 Controlling Interest in NI 75,400 50,000 34,400 9, ,000 Statement of Retained Earnings Beginning Balance 187,200 70,000 25, ,000 18,000 4,200 Net Income 75,400 50,000 34,400 9, ,000 Less: Dividends Declared (40,000) (10,000) 10,000 (40,000) Ending Balance 222, ,000 81,600 19, ,000 Balance Sheet Cash 61,600 20,000 81,600 Accounts Receivable 100,000 80, ,000 Inventory 120, , ,000 Other Assets 340, , ,000 Investment in Stone Bonds 106, ,000 0 Investment in Stone Stock 75,000 75,000 0 Total Assets 802, , ,000 1,081,600 Accounts Payable 80,000 50, ,000 Bonds Payable 200, , , ,000 Common Stock 300, , , ,000 Retained Earnings 222, ,000 81,600 19, ,000 NCI in NA of Stone Cont. 2,800 50,000 81,600 34,400 Total Liabilities & Equity 802, , , ,400 1,081,