AdvancedAccounting,lie

(Beams/Anthony/Bettinghaus/Smith)

Chapter7IntercompanyProfitTransactions-Bonds

MultipleChoiceQuestions

1)Ifthepricepaidbyaparentcompanytoacquirethedebtofasubsidiaryisgreaterthanthebookvalue

oftheliability,aoccurs.

A)realizedlossontheretirementofdebtfromtheviewpointofthesubsidiary

B)realizedgainontheretirementofdebtfromtheviewpointofthesubsidiary

C)constructivelossontheretirementofdebtfromtheviewpointoftheconsolidatedentity

D)constructivegainontheretirementofdebtfromtheviewpointoftheconsolidatedentity

Answer:C

Objective:LOI

Difficulty:Easy

2)Ifanaffiliatepurchasesbondsintheopenmarket,thebookvalueoftheintercompanybondliabilityat

thetimeofpurchaseis

A)alwaysassignedtotheparentcompanybecauseithascontrol.

B)theparvalueofthebondslesstheunamortizeddiscountorplustheunamortizedpremium.

C)parvalue.

D)theparvalueofthebondsplustheunamortizeddiscountorlesstheunamortizedpremium.

Answer:B

Objective:LOI

Difficulty：Easy

3)Bondsissuedbyacompanyremainontheirbooksasaliability,butareconsideredconstructively

retiredwhen

A)thecompanyborrowsmoneyfromunaffiliatedentitiestore-purchaseitsownbondsatagain.

B)Thecompanyborrowsmoneyfromanaffiliatetore-purchaseitsownbondsatagain.

C)Thecompany'sparentorsubsidiarypurchasesthebondsfromoutsideentities.

D)Thecompanyborrowsmoneyfromanaffiliatetorepurchaseitsownbondsatagainorataloss.

Answer:C

Objective:LOI

Difficulty:Easy

Usethefollowinginformationtoanswerthequestion(s)below.

PascalianCompanyownsa90%interestinSappCompany.OnJanuary1,,Pascalianhad$300,000,6%

bondsoutstandingwithanunamortizedpremiumof$9,000.ThebondsmatureonDecember31,.Sapp

acquiredone-thirdofPascalian'sbondsintheopenmarketfor$97,000onJanuary1,.Bothcompanies

usestraight-lineamortizationofbonddiscounts/premiums.InterestispaidonDecember31.On

December31,,thebooksofthetwoaffiliatesheldthefollowingbalances:

Pascalian'sbooks

6%bondspayable$300,000

Premiumonbonds7,200

Interestexpense16,200

Sapp'sbooks

InvestmentinPascalianbonds$97,600

Interestincome6,600

4)ThegainfromthebondpurchasethatappearedontheDecember31,consolidatedincomestatement

was

A)$4,320.

B)$4,800.

C)$5,400.

D)$6,000.

Answer:D

Explanation:D)

BookvalueofPascalian'sbonds

acquiredbySappequals1/3

times($300,000+$9,000)$103,000

ICcotofacquiring

Pascalianbonds(97,000)

Constructivegainonbonds$6,000

Objective:LO2

Difficulty:Ndoderate

6)PrussiaCorporationowns80%thevotingstockofStadCorporation.OnJanuary1,,Prussiapaid

$391,000cashfor$400,000parofStad's10%$1,000,000parvalueoutstandingbonds,dueonApril

1,.Stad'sbondshadabookvalueof$1,045,000onJanuary1,Straight-lineamortizationisusedThegain

orlossontheconstructiveretirementof$400,000ofStadbondsonJanuary1,wasreportedinthe

consolidatedincomestatement:ntheamountof

A)$14,000.

B)$21,600.

C)$23,000.

D)$27,000.

Answer:D

Objective:LO2

Difficulty:Moderate

Usethefollowinginformationtoansiverthequestion(s)below.

PfadtInc.had$600,000parof8%bondspayableoutstandingonJanuary1,dueJanuary1,withan

unamortizeddiscountof$12zOOO.Senatisa90%-ownedsubsidiaryofPfadt.OnJanuary2,,Sena:

Corporationpurchased$150,000parvalueofPfadt'soutstandingbondsfor$152,000.Thebondshave

interestpaymentdatesofJanuary1andJuly1.Straight-lineamortizationisused.

7)Withrespecttothebondpurchase,theconsolidatedincomestatementofPfadtCorporationand

Subsidiaryforshowedagainorlossof

A)$4,500.

B)$5,000.

C)$10z800.

D)$12,000.

Answer:B

Explanation:B)[($588,000x0.25)-$152,000]

Objective:LO2

Difficulty：Moderate

8)BondInterestReceivableforofPfadt'sbondsonSenat'sbookswas

A)$5,400.

B)$6,000.

C)$10,800.

D)$12,000.

Answer:B

Explanation:B)[$150,000x8%x1/2]

Objective:LO2

Difficulty：Moderate

9)BondsPayableappearedintheDecember31,consolidatedbalancesheetofPfadtCorporationand

Subsidiaryintheamountof

A)$398,925.

B)$441,000.

C)$443,250.

D)$450,000.

Answer:C

Explanation:C)[$591,000x75%]

Objective：LO2

Difficulty:Moderate

Usethefollowinginformationtoanswerthequestion(s)below.

PlentyCorporationissuedsixthousand,$1,000par,6%bondsonJanuary1,,atparInterestispaidon

January1andJuly1ofeachyear;thebondsmatureonJanuary1,.OnJanuary2,,ScrawnCorporation,

a75%-ownedsubsidiaryofPlenty,purchased3,000ofthebondsontheopenmarketat102.50.Plenty's

separatenetincomeforincludedtheannualinterestexpenseforall3,000bonds.Scrawn'sseparatenet

incomeforwas$400,000,whichincludedthebondinterestreceivedonJuly1aswellastheaccrualof

bondinterestrevenueearnedonDecember31.Bothcompaniesusestraight-lineamortizationofbond

discounts/premiums.

10)Whatwastheamountofgainor(loss)fromtheintercompanypurchaseofPlenty'sbondsonJanuary

2,?

A)$(56,250)

B)$(75,000)

C)$75,000

D)$56,250

Answer:B

Explanation:B)

Totalbookvalueacquired=

$6,000,000x50%$3,000,000

Purchaseprice3,000x$1,0253,075000

Lossonconstructiveretirement$75000

Objective:LO2

Difficulty:Moderate

11)Ifthebondswereoriginallyissuedat106,and80%ofthemwerepurchasedbyScrawnonJanuary2,

at98,thegainor(loss)fromtheintercompanypurchasewas

A)$(384,000).

B)$(211,200).

C)$211,200.

D)$384,000.

Answer:C

Explanation:C)

BookvalueatJanuary2,equals

$6,360,000minus$216,000=$6,144,000

Percentageofbondsacquired80%

Equalsbookvalueacquired4,915,200

Purchasepiice4,800bundsx$980—4,704,000

Gainonconstructiveretirement=$21L200

Objective:LO2

Difficulty:Moderate

12)Ifthebondswereoriginallyissuedat103,and70%ofthemwerepurchasedonJanuary2,at104,the

constructivegainor(loss)onthepurchasewas

A)$(142,800).

B)$(42,000).

C)$42,000.

D)$142,800.

Answer:A

Explanation:A)

Bookvalue<ilJcinuctiy2,uquuls

$6,180,000minus$144,000$6,036,000

Percentageofbondsacquired70%

Equalsbookvalueacquired4,225,200

Purchaseprice4,200bondsx$1,0404,368,000

Lossonconstructiveretirement$142z800

Objective:LO2

Difficulty:Moderate

13)Usingtheoriginalinformation,theamountofconsolidatedInterestExpenseforwas

A)$135,000.

B)$180,000.

C)$270,000.

D)$360,000.

Answer:B

Explanation:B)($6,000,000-$3,000,000)x6%

Objective：LO2

Difficulty:Moderate

14)Usingtheoriginalinformation,thebalancesfortheBondsPayableandBondInterestPayable

accounts,respectively,ontheconsolidatedbalancesheetforDecember31,were

A)$3,000,000and$90,000.

B)$3,000,000and$180,000.

C)$6,000,000and$90,000.

D)$6,000,000and$180,000.

Answer:A

Explanation:A)Bondspayable$6,000,000minusbondsheldbyScrawnof$3,000,000.Interestaccruedon

December31,willbetheinterestonbondsheldbynon-affiliatesor$3,000,000X6%X1/2year

Objective:LO2,3

Difficulty:Moderate

15)Usingtheoriginalinformation,theeliminationentriesontheconsolidationworkingpapersprepared

onDecember31,includedatleast

A)debittoBondInterestExpensefor$360,000.

B)credittoBondInterestExpensefor$180,000andadebittoBondInterestPayablefor$90,000.

C)credittoBondInterestReceivablefor§180,000.

D)debittoBondInterestRevenuefor$360,000.

Answer:B

Objective:LO2

Difficulty:Moderate

16)Noconstructivegainorlossarisesfromthepurchaseofanaffiliate'sbondsifthe

A)affiliateisa100%-ownedsubsidiary.

B)bondsarepurchasedatbookvalue.

C)bondsarepurchasedwitharm's-lengthbargainingfromoutsideentities.

D)gainorlosscannotbereasonablyestimated.

Answer:B

Objective:LOI

Difficulty：Easy

17)Thereareseveraltheoriesforallocatingconstructivegainsorlossesbetweenpurchasingandissuing

affiliates.TheAgencyTheory

A)doessobasedontheparvalueofthebondspurchased.

B)assignstheentireconstructivegainorlosstotheparentbasedontheircontrolofthedecisionto

purchasethebonds.

C)assignstheentireconstructivegainorlosstothesubsidiarybasedontheneedtohavethe

noncontrollinginterestshareintheretirementofthedebt.

D)assignstheentireconstructivegainorlosstowhichevercompanyissuedthebonds.

Answer:D

Objective:LOI

Difficulty:Easy

18)PickleIncorporatedacquireda$10,000bondoriginallyissuedbyits80%-ownedsubsidiaryon

January2,.Thebondwasissuedinaprioryearfor$11,250,maturesJanuarylz,andpays9%interestat

December31.Thebond'sbookvalueatJanuary2,is$10,625,andPicklepaid$9,500topurchaseit.

Straight-lineamortizationisusedbybothcompanies.Howmuchinterestincomeshouldbeeliminated

A)$720

B)$800

C)$900

D)$1,000

Answer:D

Explanation:D)$9,500-$10,000=discounttoamortizeasinterestexpenseover5years,or$100peryear

+$900paidbyissuer.

Objective:LO2,3

Difficulty:Moderate

Usethefollowinginformationtoansioerthequestion(s)below.

PoeCorporationownsan80%interestinSeriCompanyacquiredatbookvalueseveralyearsago.On

January2,,Seripurchased$100,000parofPoe'soutstanding10%bondsfor$103,000.Thebondswere

issuedatparandmatureonJanuary1,.Straight-lineamortizationisused.SeparateincomesofFoeand

Seriforare$350,000and$120,000,respectively.Poeusestheequitymethodtoaccountfortheinvestment

inSeri.

19)Controllinginterestshareofconsolidatednetincomeforwas

A)$443,600.

B)$444,000.

C)$444,400.

D)$448,000.

Answer:B

Explanation:B)

Poe'sseparateincome$350,003

IncomefromSeri($120,000x80%)96,000

Less:LossonconstructiveretirementofPoebonds(3,00C)

Plus:Piecemealrecognitionofthe

constructiveloss($3,000/3years)LOOJ

Controllinginterestshare$444的

Objective:LO4

Difficulty：Moderate

20)Noncontrollinginterestshareforwas

A)$23,000.

B)$23,600.

C)$24,000.

D)$24,400.

Answer:C

Explanation:C)SincePoeistheissuingentity,thegainorlossisnotallocatedtothenoncontroEing

intcrcst.Thcnoncontrollinginterestshareis($120,000X20%)=$24,000.

Objective:LO4

Difficulty:Moderate

Exercises

1)SeparatecompanyandconsolidatedincomestatementsforPittaandSojournCorporationsfortheyear

endedDecember31,aresummarizedasfollows:

PittaSouiournConsolidated

SalesRevenue$500,000$100,000$600,000

IncomefromSojourn19,900

Bondinterestincome6,000

Gainonbondretirement3,000

Totalrevenues519,900106,000603,000

Costofsales$280,000$50,000$330,000

Bondinterestexpense9,0003,600

Otherexpenses120,9003L00015L900

Totalexpenses409,90081,000485,500

Consolidatednetincome117,500

Noncontrollinginterestshare7,500

Separatenetincomeand

Cerestsharein

consolidatednetincome$110,000$25,000$110,000

Theinterestincomeandexpenseeliminationsrelatetoa$100,000,9%bondissuethatwasissuedatpar

valueandmaturesonJanuary1,.OnJanuary2,,aportionofthebondswaspurchasedand

constructivelyretired.

Required:Answerthefollowingquestions.

1.Whichcompanyistheissuingaffiliateofthebondspayable?

2.Whatisthegainorlossfromtheconstructiveretirementofthebondspayablethatisreportedonthe

consolidatedincomestatementfor?

3.WhatportionofthebondspayableisheldbynonaffiliatesatDecember31z?

4.IsSojournawholly-ownedsubsidiary?Ifnot,whatpercentagedocsPittaown?

5.Doesthepurchasingaffiliateusestraight-lineoreffectiveinterestamortization?

6.ExplainthecalculationofPitta's$19,900incomefromSojourn.

Answer:

1.Pittaistheissuingaffiliate.

2.Effectonconsolidatednetincome:

Gainonconstructiveretirementofbonds$3,000

3.PercentofbondsheldbynonaffiliatesatDecember31,is43%,computedas$3,600consolidated

interestexpensedividedby$9,C00interestexpenseofPitta.

4.Sojournispartiallyownedasevidencedbythenoncontrollinginterestshare.Theownership

percentageis70%($7,500nonccntrollinginterestsharedividedby$25,000incomeofSojourn=30%

noncontrollinginterest.)

5.Straight-lineamortization

$100,000parx60%purchased$60,000

Purchaseprice5yearsbeforematurity57,000

Gain—3,000

Nominalinterest($60,000x9%)$5z400

Discountamortization(53,000/5years)600

Bondinterestincome$6,000

6.Pitta'sincomefromSojourn

ShareofSojourn'sreportedincome

($25,000x70%)=$17,500

Add:Constructivegain3,000

Less:Piecemealrecognitionofconstructive

gain(600)

IncomefromSojourn$19,900

Objective:LOI,2,4

Difficulty:Moderate

2)PlattsIncorporatedpurchased80%ofScarabCompanyseveralyearsagowhenthefairvalueequaled

thebookvalue.OnJanuary1,,Scarabhas$100,000of8%bondsthatwereissuedatfacevalueandhave

fiveyearstomaturity.InterestispaidannuallyonDecember31.BothPlattsandScarabwouldusethe

straight-linemethodtoamortizeanypremiumordiscountincurredintheissuanceorpurchaseaf

bonds.OnJanuary1,,PlattspurchasedallofScarab'sbondsfor$96,000.

Required:

1.PreparethejournalentriesinthatwouldberecordedbyPlattsandScarabontheirseparatefinancial

records.

2.PreparetheconsolidatingworkingpaperentriesrequiredfcrtheyearendingDecember31,.

Answer:

Requirement1:

Plattsentries:

1/1/11Investmentinbonds$96,000

Cash$96,000

12/31/11Cash8,000

Interestincome8,000

Investmentinbonds1,000

Interestincome1,000

ScarabenIries.

12/31/11Interestexpense8,000

Cash8,000

Requirement2:

Consolidatingentries:

12/31/11Bondspayable100,000

【nvpqfmpntinhendq97,000

Gainonretirementofdebt3,000

Interestincome9,000

Interestexpense8,000

Gainonretirementofdebt1,000

Objective:LO2,3

Difficulty：Moderate

3)PakaCorporationownsan8C%interestinSandraCompany.PakaacquiredSandra'sbondsonJanuary

2,.ThefollowinginformationisfromtheadjustedtrialbalancesatDecember31,,atwhichtimethe

bondshavethreeyearstomaturity.ThebondshaveinterestpaymentdatesofJanuary1andJuly

1.Straight-lineamortizationisusedbybothcompanies.

PakaSandra

InvestmentinSandraBonds,$100,000par98,500

7%Bondspayable,$200,000200,000

Bondpremium6,000

Interestexpense12,000

Interestreceivable7,000

Interestincome7,500

Interestpayable7,000

Required:

PreparethenecessaryconsolidationworkingpaperentriesonDecember31,withrespecttothe

intercompanybonds.

Answer:

DebitCredit

12/31BondInterestPayable7,003

BondInterestReceivable7,000

12/31BondsPayable100,009

InterestIncome7,50。

Bondpremium3,003

InterestExpense(50%owned)6,000

InvestmentinSandra'sBonds98,500

Gainonretirementofbonds6,000

SupportingComputations:

CostofbondstoPaka($98,500-$500)$98,000

Bookvalueacquired1/1/where

$2,000peryearisamortized

($200,000+$8,000)x50%=104,000

Gainonconstructivebondretirement$6,000

Objective:LO2,3

Difficulty：Moderate

4)PheasantCorporationowns80%ofSalCorporation'soutstandingcommonstockthatwaspurchasedat

bookvalueequaltofairvalueonJanuary1,.

Additionalinformation:

1.Pheasantsoldinventoryitemsthatcost$3,000toSalduringforS6,OOO.One-halfofthismerchandise

wasinventoriedbySalatyear-end.AtDecember31,,SalowedPheasant$2,000onaccountfromthe

inventorysales.NootherintercompanysalesofinventoryhaveoccurredsincePheasantacquiredits

interestinSal.

2.Pheasantsoldequipmentwithabookvalueof$5,000anda5-yearusefullifetoSalfor$10,000on

December31,.TheequipmentremainsinusebySalandisdepreciatedbythestraight-linemethod.The

equipmenthasnosalvagevalue.

3.OnJanuary2,,Salpaid$10,800for$10,000parvalueofPheasant's10-ycar,10%bonds.Thescbonds

wereoriginallysoldatparvalue,andhaveinterestpaymentdatesofJanuary1andJuly1,andmatureon

January1,.Straight-lineamortizationhasbeenappliedbySaltothePheasantbondinvestment.

4.PheasantusestheequitymethodinaccountingforitsinvestmentinSal.

Required:

CompletetheworkingpaperstoconsolidatethefinancialstatementsofPheasantCorporationandSalfor

theyearendedDecember31,.

Eliminations

PheasantSalDebitCreditConsolidated

INCOMESTATEMENT

Sales$50,000$24,000

Investment

incomefromSal6,900

Lossonbonds

InterestIncome800

Costofsales(14,000)(9,000)

Depreciation(3,900)(5,800)

Interestexpense(2,000)

Noncontrolling

interestshare

Controlling

interestshare37,00010,000

Retained

Earnings1/112,0008,000

Add:Controlling37,00010,000

interestshare

Dividends(6,000)(2,000)

Retained

Earnings12/31$43,000$16,000

BALANCESHEET

Cash8,0001,400

InterestRec.500

Receivables11,0003,500

Inventories5,0003,000

Equipment-net43,00031,000

Investmentin

Salstock30,100

Investmentin

Pheasantbonds10,600

TOTALASSETS$97,100$50,000

LIAB.&EQUITY

Accountspayable3,1006,000

Interestpayable1,000

Bondspayable20,000

Capitalstock30,00028,000

Retained

Earnings43,00016,000

1/1Noncontl.

Interest

12/31Noncontl.

Interest

TOTALLIAB.&

EQUITY$97,100$50,000

Answer:

Eliminations

PheasantSalDebitCreditConsolidated

INCOMESTATEMENT

Sales$50,000$24,0001$6,000$68,000

Investment

incomefromSal6,900k>6,900

Lossonbonds800(800)

InterestIncome800h800

Costofsales(14,000)(9,000)e1,5001$6,000(18,500)

Depreciation(3,900)(5,800)€1,000(8,700)

Interestexpense(2,000)卜1,000(1,000)

Noncontrolling

interestsharec2,000(2,000)

Controlling

interestshare37,00010,00037,000

Retained

Earnings1/112,0008,000c8,00012,000

Add:Controlling37,00010,00037,000

interestshare

L1,600

Dividends(6,000)(2,000)c400(6,000)

Retained

Earnings12/31$43,000$16,000$43,000

BALANCESHEET

Cash8,0001,400$9,400

InterestRec500j500

Receivables11,0003,5002,00012,500

Inventories5,0003,000J1,5006,500

Equipment-net43,00031,0003,00071,000

Investmentin?4rooob5,300

Salstock30,100128,800

Investmentin

Pheasantbonds10,600i10,600

rOTALASSETS$97,100$50,000$99,400

LIAB.&EQUITY

Accountspayable3,1006,000cj2,0007,100

Interestpayable1,000J500500

Bondspayable20,00010,000

Capitalstock30,00028,000ki28,00030,000

Retained

Earnings43,00016,00043,000

1/1Noncontl.

Interestc17,200

12/31Noncontl.

Interest1,6008,800

FOTALLIAB.&$99,400

EQUITY$97,100$50,000

Objective:LO2,3

Difficulty：Difficult

5)Phaunapaid$120,000forits80%interestinSchrubonJanuary1,whenSchrubhad$150,000oftotal

stockholders'equity.

OnJanuary1,,Phaunapurchased$50,000ofSchrubCorporation's8%bondsfor$48,000.Atthattime,

$100,000ofbondshadbeenissuedbySchrub,andunamortizedpremiumwas$2,000.Thebondspay

interestonJune30andDecember31andmatureonDecember31,.BothPhaunaandSchrubusestraight-

lineamortization.PhaunausestheequitymethodofaccountingforitsinvestmentinSchrub.

Required:

Prepareeliminating/adjustingentriesforthebondsontheconsolidatingworkpapersfortheyearended

December31,.

Answer:

12/31/

Interestincome(8%x$50,000)+($2,000/5)4,400

Interestexpense(8%x$50,000)-($1,000/5)3,800

Gainonretirementofbonds600

Bondspayable50,000

Premiumonbondspayable800

Bondinvestment48,400

Gainonretirementofbonds2,400

Premiumonbondspayable:

$1,000-$1,000/5=$800

Bondinvestment:

$48,000+$2,000/5=$48,400

Supportingcomputations:

Bookvalueofbonds

($102,000x50%)$51,000

Costofacquiring$50,000par(48,000)

Constructivegain3z000

Piecemealrecognitionofgain(600)

UnrecognizedatDecember31,$2,400

Objective:LO2,3

Difficulty:Difficult

6)PelamiCorporationownsa90%interestinSunbirdCorporation.AtDecember31,,Sunbirdhad

$3,000,000ofparvalue6%bondsoutstandingwithanunamortizedpremiumof$30z000.Thebondshave

interestpaymentdatesofJanuary1andJuly1andmatureonJanuary1,.

OnJanuary2,,Pelamipurchased$1,200,000parvalueofSunbird'soutstandingbondsfor

$1,210,000.Assumestraight-lineamortization.

Required:

Preparethenecessaryconsolidationworkingpaperentrieswithrespecttotheintercompanybondsfor

theyearendingDecember31,.

Answer:

_DebitCredit

12/31BondInterestPayable36,000

BondInterestReceivable36,00。

12/31PremiumonBondsPayable9,000

BondsPayable1,200,000

InterestRevenue69,500

InterestExpense69,003

InvestmentinSunbirdBonds1,207,500

GainonRetirementofBonds2,003

SupportingComputations:

CostofbondstoPelami$1,210,003

Bookvalueacquired

($3,000,000+$30,000)x40%=1,212,00。

Gainonconstructivebondretirement$2zOO3

4yearsremaining

PremiumonBondPayable

$30,000x3/4x40%=$9,000

InterestExpense

$1,200,000x6%=$72,000

Less:$30,000x1/4x40%=$3,000

$69,000

InterestRevenue

$72,000-($10,000x1/4)=$69,500

Objective:LO2,3

Difficulty:Moderate

7)Spottisa75%-ownedsubsidiaryofPenthaLOnJanuary1,,Spottissued$900,000of$1,000face

amount8%bondsatpar.ThebondshaveinterestpaymentsonJanuary1andJuly1ofeachyearand

matureonJanuary