江西财经大学高级财务会计国际学院试题库chapter_

Advanced Accounting, 11e (Beams/Anthony/Bettinghaus/Smith)
Chapter 7 Interpany Profit Transactions - Bonds
Multiple Choice Questions
1) If the price paid by a parent pany to acquire the debt of a subsidiary is greater than the book value of the liability, a ________ occurs.
A) realized loss on the retirement of debt from the viewpoint of the subsidiary
B) realized gain on the retirement of debt from the viewpoint of the subsidiary
C) constructive loss on the retirement of debt from the viewpoint of the consolidated entity
D) constructive gain on the retirement of debt from the viewpoint of the consolidated entity
Answer: C
Objective: LO1
Difficulty: Easy
2) If an affiliate purchases bonds in the open market, the book value of the interpany bond liability at the time of purchase is
A) always assigned to the parent pany because it has control.
B) the par value of the bonds less the unamortized discount or plus the unamortized premium.
C) par value.
D) the par value of the bonds plus the unamortized discount or less the unamortized premium.
Answer: B
Objective: LO1
Difficulty: Easy
3) Bonds issued by a pany remain on their books as a liability, but are considered constructively retired when
A) the pany borrows money from unaffiliated entities to re-purchase its own bonds at a gain.
B) The pany borrows money from an affiliate to re-purchase its own bonds at a gain.
C) The pany's parent or subsidiary purchases the bonds from outside entities.
D) The pany borrows money from an affiliate to repurchase its own bonds at a gain or at a loss.
Answer: C
Objective: LO1
Difficulty: Easy
Use the following information to answer the question(s) below.
Pascalian pany owns a 90% interest in Sapp pany. On January 1, 2010, Pascalian had $300,000, 6% bonds outstanding with an unamortized premium of $9,000. The bonds mature on December 31, 2014. Sapp acquired
one-third of Pascalian's bonds in the open market for $97,000 on January 1, 2010. Both panies use straight-line amortization of bond discounts/premiums. Interest is paid on December 31. On December 31, 2010, the books of the two affiliates held the following balances:
Pascalian's books
6% bonds payable$300,000
Premium on bonds7,200
Interest expense16,200
Sapp's books
Investment in Pascalian bonds$ 97,600
Interest ine6,600
4) The gain from the bond purchase that appeared on the December 31, 2010 consolidated ine statement was
A) $4,320.
B) $4,800.
C) $5,400.
D) $6,000.
Answer: D
Explanation: D)
Book value of Pascalian's bonds
acquired by Sapp equals 1/3
times ($300,000 + $9,000)$103,000
Less: Cost of acquiring
Pascalian bonds( 97,000)
Constructive gain on bonds$ 6,000
Objective: LO2
Difficulty: Moderate
5) Consolidated Interest Expense and consolidated Interest Ine, respectively, that appeared on the consolidated ine statement for the year ended December 31, 2010 was
A) $10,800 and $0.
B) $10,800 and $6,600.
C) $0 and $0.
D) $16,200 and $6,600.
Answer: A
Explanation: A) Consolidated interest expense =
$16,200 × 2/3$10,800
Objective: LO2
Difficulty: Moderate
6) Prussia Corporation owns 80% the voting stock of Stad Corporation. On January 1, 2010, Prussia paid $391,000 cash for $400,000 par of Stad's 10% $1,000,000 par value outstanding bonds, due on April 1, 2015. Stad's bonds had a book value of $1,045,000 on January 1, 2010. Straight-line amortization is used. The gain or loss on the constructive retirement of $400,000 of Stad bonds on January 1, 2010 was reported in the 2010 consolidated ine statement in the amount of
A) $14,000.
B) $21,600.
C) $23,000.
D) $27,000.
Answer: D
Objective: LO2
Difficulty: Moderate
Use the following information to answer the question(s) below.
Pfadt Inc. had $600,000 par of 8% bonds payable outstanding on January 1, 2011 due January 1, 2015 with an unamortized discount of $12,000. Senat is a 90%-owned subsidiary of Pfadt. On January 2, 2011, Senat Corporation purchased $150,000 par value of Pfadt's outstanding bonds for $152,000. The bonds have interest payment dates of January 1 and July 1. Straight-line amortization is used.
7) With respect to the bond purchase, the consolidated ine statement of Pfadt Corporation and Subsidiary for 2011 showed a gain or loss of
A) $ 4,500.
B) $ 5,000.
C) $10,800.
D) $12,000.
Answer: B
Explanation: B) [($588,000 × 0.25) -$152,000]
Objective: LO2
Difficulty: Moderate
8) Bond Interest Receivable for 2011 of Pfadt's bonds on Senat's books was
A) $5,400.
B) $6,000.
C) $10,800.
D) $12,000.
Answer: B
Explanation: B) [$150,000 × 8% × 1/2]
Objective: LO2
Difficulty: Moderate
9) Bonds Payable appeared in the December 31, 2011 consolidated balance sheet of Pfadt Corporation and Subsidiary in the amount of
A) $398,925.
B) $441,000.
C) $443,250.
D) $450,000.
Answer: C
Explanation: C) [$591,000 × 75%]
Objective: LO2
Difficulty: Moderate
Use the following information to answer the question(s) below.
Plenty Corporation issued six thousand, $1,000 par, 6% bonds on January 1, 2010, at par. Interest is paid on January
1 and July 1 of each year; the bonds mature on January 1, 2015. On January 2, 2012, Scrawn Corporation, a
75%-owned subsidiary of Plenty, purchased 3,000 of the bonds on the open market at 102.50. Plenty's separate net ine for 2012 included the annual interest expense for all 3,000 bonds. Scrawn's separate net ine for 2012 was $400,000, which included the bond interest received on July 1 as well as the accrual of bond interest revenue earned on December 31. Both panies use straight-line amortization of bond discounts/premiums.
10) What was the amount of gain or (loss) from the interpany purchase of Plenty's bonds on January 2, 2012?
A) $(56,250)
B) $(75,000)
C) $ 75,000
D) $ 56,250
Answer: B
Explanation: B)
Total book value acquired =
$6,000,000 × 50% $3,000,000
Purchase price 3,000 × $1,025 3,075,000
Loss on constructive retirement$ 75,000
Objective: LO2
Difficulty: Moderate
11) If the bonds were originally issued at 106, and 80% of them were purchased by Scrawn on January 2, 2013 at 98, the gain or (loss) from the interpany purchase was
A) $(384,000).
B) $(211,200).
C) $ 211,200.
D) $ 384,000.
Answer: C
Explanation: C)
Book value at January 2, 2013 equals
$6,360,000 minus $216,000=$6,144,000
Percentage of bonds acquired 80%
Equals book value acquired4,915,200
Purchase price 4,800 bonds × $980= 4,704,000
Gain on constructive retirement= $ 211,200
Objective: LO2
Difficulty: Moderate
12) If the bonds were originally issued at 103, and 70% of them were purchased on January 2, 2014 at 104, the constructive gain or (loss) on the purchase was
A) $(142,800).
B) $( 42,000).
C) $ 42,000.
D) $ 142,800.
Answer: A
Explanation: A)
Book value at January 2, 2014 equals
$6,180,000 minus $144,000 $6,036,000
Percentage of bonds acquired 70%
Equals book value acquired 4,225,200
Purchase price 4,200 bonds × $1,040 4,368,000
Loss on constructive retirement $ 142,800
Objective: LO2
Difficulty: Moderate
13) Using the original information, the amount of consolidated Interest Expense for 2012 was
A) $ 135,000.
B) $ 180,000.
C) $ 270,000.
D) $ 360,000.
Answer: B
Explanation: B) ($6,000,000 - $3,000,000) × 6%
Objective: LO2
Difficulty: Moderate
14) Using the original information, the balances for the Bonds Payable and Bond Interest Payable accounts, respectively, on the consolidated balance sheet for December 31, 2013 were
A) $3,000,000 and $ 90,000.
B) $3,000,000 and $180,000.
C) $6,000,000 and $ 90,000.
D) $6,000,000 and $180,000.
Answer: A
Explanation: A) Bonds payable $6,000,000 minus bonds held by Scrawn of $3,000,000. Interest accrued on December 31, 2013 will be the interest on bonds held by non-affiliates or $3,000,000 × 6% × 1/2 year Objective: LO2, 3
Difficulty: Moderate
15) Using the original information, the elimination entries on the consolidation working papers prepared on December 31, 2012 included at least
A) debit to Bond Interest Expense for $360,000.
B) credit to Bond Interest Expense for $180,000 and a debit to Bond Interest Payable for $90,000.
C) credit to Bond Interest Receivable for $180,000.
D) debit to Bond Interest Revenue for $360,000.
Answer: B
Objective: LO2
Difficulty: Moderate
16) No constructive gain or loss arises from the purchase of an affiliate's bonds if the
A) affiliate is a 100%-owned subsidiary.
B) bonds are purchased at book value.
C) bonds are purchased with arm's-length bargaining from outside entities.
D) gain or loss cannot be reasonably estimated.
Answer: B
Objective: LO1
Difficulty: Easy
17) There are several theories for allocating constructive gains or losses between purchasing and issuing affiliates. The Agency Theory
A) does so based on the par value of the bonds purchased.
B) assigns the entire constructive gain or loss to the parent based on their control of the decision to purchase the bonds.
C) assigns the entire constructive gain or loss to the subsidiary based on the need to have the noncontrolling interest share in the retirement of the debt.
D) assigns the entire constructive gain or loss to whichever pany issued the bonds.
Answer: D
Objective: LO1
Difficulty: Easy
18) Pickle Incorporated acquired a $10,000 bond originally issued by its 80%-owned subsidiary on January 2, 2011. The bond was issued in a prior year for $11,250, matures January 1, 2016, and pays 9% interest at December 31.
The bond's book value at January 2, 2011 is $10,625, and Pickle paid $9,500 to purchase it. Straight-line amortization is used by both panies. How much interest ine should be eliminated in 2011?
A) $720
B) $800
C) $900
D) $1,000
Answer: D
Explanation: D) $9,500 - $10,000 = discount to amortize as interest expense over 5 years, or $100 per year + $900 paid by issuer.
Objective: LO2, 3
Difficulty: Moderate
Use the following information to answer the question(s) below.
Poe Corporation owns an 80% interest in Seri pany acquired at book value several years ago. On January 2, 2011, Seri purchased $100,000 par of Poe's outstanding 10% bonds for $103,000. The bonds were issued at par and mature on January 1, 2014. Straight-line amortization is used. Separate ines of Poe and Seri for 2011 are $350,000 and $120,000, respectively. Poe uses the equity method to account for the investment in Seri.
19) Controlling interest share of consolidated net ine for 2011 was
A) $443,600.
B) $444,000.
C) $444,400.
D) $448,000.
Answer: B
Explanation: B)
Poe's separate ine$ 350,000
Ine from Seri ($120,000 × 80%) 96,000
Less: Loss on constructive retirement of Poe bonds(3,000)
Plus: Piecemeal recognition of the
constructive loss ($3,000/3 years) 1,000
Controlling interest share$ 444,000
Objective: LO4
Difficulty: Moderate
20) Noncontrolling interest share for 2011 was
A) $23,000.
B) $23,600.
C) $24,000.
D) $24,400.
Answer: C
Explanation: C) Since Poe is the issuing entity, the gain or loss is not allocated to the noncontrolling interest. The noncontrolling interest share is ($120,000 × 20%) = $24,000.
Objective: LO4
Difficulty: Moderate
Exercises
1) Separate pany and consolidated ine statements for Pitta and Sojourn Corporations for the year ended December 31, 2011 are summarized as follows:
Pitta Soujourn Consolidated
Sales Revenue$ 500,000$ 100,000$ 600,000
Ine from Sojourn19,900
Bond interest ine6,000
Gain on bond retirement3,000
Total revenues519,900106,000603,000
Cost of sales$ 280,000$ 50,000$ 330,000
Bond interest expense9,0003,600
Other expenses 120,900 31,000 151,900
Total expenses 409,900 81,000 485,500
Consolidated net ine 117,500
Noncontrolling interest share 7,500
Separate net ine and
Control. interest share in
consolidated net ine$ 110,000 $ 25,000$ 110,000
The interest ine and expense eliminations relate to a $100,000, 9% bond issue that was issued at par value and matures on January 1, 2016. On January 2, 2011, a portion of the bonds was purchased and constructively retired.
Required: Answer the following questions.
1.Which pany is the issuing affiliate of the bonds payable?
2.What is the gain or loss from the constructive retirement of the bonds payable that is reported on the consolidated ine statement for 2011?
3.What portion of the bonds payable is held by nonaffiliates at December 31, 2011?
4.Is Sojourn a wholly-owned subsidiary? If not, what percentage does Pitta own?
5.Does the purchasing affiliate use straight-line or effective interest amortization?
6.Explain the calculation of Pitta's $19,900 ine from Sojourn.
Answer:
1.Pitta is the issuing affiliate.
2.Effect on consolidated net ine:
Gain on constructive retirement of bonds$ 3,000
3.Percent of bonds held by nonaffiliates at December 31, 2011 is 40%, puted as $3,600 consolidated interest expense divided by $9,000 interest expense of Pitta.
4.Sojourn is partially owned as evidenced by the noncontrolling interest share. The ownership percentage is 70% ($7,500 noncontrolling interest share divided by $25,000 ine of Sojourn = 30% noncontrolling interest.)
5.Straight-line amortization
$100,000 par × 60% purchased$60,000
Purchase price 5 years before maturity 57,000
Gain 3,000
Nominal interest ($60,000 × 9%)$ 5,400
Discount amortization ($3,000/5 years) 600
Bond interest ine $ 6,000
6.Pitta's ine from Sojourn
Share of Sojourn's reported ine
($25,000 × 70%) = $17,500
Add: Constructive gain3,000
Less: Piecemeal recognition of constructive
gain (600)
Ine from Sojourn$19,900
Objective: LO1, 2, 4
Difficulty: Moderate
2) Platts Incorporated purchased 80% of Scarab pany several years ago when the fair value equaled the book value. On January 1, 2010, Scarab has $100,000 of 8% bonds that were issued at face value and have five years to maturity. Interest is paid annually on December 31. Both Platts and Scarab would use the straight-line method to amortize any
premium or discount incurred in the issuance or purchase of bonds. On January 1, 2011, Platts purchased all of Scarab's bonds for $96,000.
Required:
1.Prepare the journal entries in 2011 that would be recorded by Platts and Scarab on their separate financial records.
2.Prepare the consolidating working paper entries required for the year ending December 31, 2011.
Answer:
Requirement 1:
Platts entries:
1/1/11Investment in bonds$96,000
Cash$96,000
12/31/11Cash8,000
Interest ine 8,000
Investment in bonds1,000
Interest ine 1,000
Scarab entries:
12/31/11Interest expense 8,000
Cash 8,000
Requirement 2:
Consolidating entries:
12/31/11Bonds payable100,000
Investment in bonds97,000
Gain on retirement of debt3,000
Interest ine9,000
Interest expense8,000
Gain on retirement of debt1,000
Objective: LO2, 3
Difficulty: Moderate
3) Paka Corporation owns an 80% interest in Sandra pany. Paka acquired Sandra's bonds on January 2, 2011. The following information is from the adjusted trial balances at December 31, 2011, at which time the bonds have three years to maturity. The bonds have interest payment dates of January 1 and July 1. Straight-line amortization is used by both panies.
Paka Sandra
Investment in Sandra Bonds, $100,000 par98,500
7% Bonds payable, $200,000200,000
Bond premium6,000
Interest expense12,000
Interest receivable7,000
Interest ine7,500
Interest payable7,000
Required:
Prepare the necessary consolidation working paper entries on December 31, 2011 with respect to the interpany bonds. Answer:
2011 Debit Credit
12/31Bond Interest Payable7,000
Bond Interest Receivable7,000
12/31Bonds Payable100,000
Interest Ine7,500
Bond premium3,000
Interest Expense (50% owned)6,000
Investment in Sandra's Bonds98,500
Gain on retirement of bonds6,000
Supporting putations:
Cost of bonds to Paka ($98,500 - $500)$98,000
Book value acquired 1/1/2011 where
$2,000 per year is amortized
($200,000 + $8,000) × 50% = 104,000
Gain on constructive bond retirement$6,000
Objective: LO2, 3
Difficulty: Moderate
4) Pheasant Corporation owns 80% of Sal Corporation's outstanding mon stock that was purchased at book value equal to fair value on January 1, 2005.
Additional information:
1.Pheasant sold inventory items that cost $3,000 to Sal during 2012 for $6,000. One-half of this merchandise was inventoried by Sal at year-end. At December 31, 2012, Sal owed Pheasant $2,000 on account from the inventory sales. No other interpany sales of inventory have occurred since Pheasant acquired its interest in Sal.
2.Pheasant sold equipment with a book value of $5,000 and a 5-year useful life to Sal for $10,000 on December 31, 2010. The equipment remains in use by Sal and is depreciated by the straight-line method. The equipment has no salvage value.
3.On January 2, 2012, Sal paid $10,800 for $10,000 par value of Pheasant's 10-year, 10% bonds. These bonds were originally sold at par value, and have interest payment dates of January 1 and July 1, and mature on January 1, 2016. Straight-line amortization has been applied by Sal to the Pheasant bond investment.
4.Pheasant uses the equity method in accounting for its investment in Sal.
Required:
plete the working papers to consolidate the financial statements of Pheasant Corporation and Sal for the year ended
December 31, 2012.
Answer:
Objective: LO2, 3
Difficulty: Difficult
5) Phauna paid $120,000 for its 80% interest in Schrub on January 1, 2009 when Schrub had $150,000 of total stockholders' equity.
On January 1, 2012, Phauna purchased $50,000 of Schrub Corporation's 8% bonds for $48,000. At that time, $100,000 of bonds had been issued by Schrub, and unamortized premium was $2,000. The bonds pay interest on June 30 and December 31 and mature on December 31, 2016. Both Phauna and Schrub use straight-line amortization.
Phauna uses the equity method of accounting for its investment in Schrub.
Required:
Prepare eliminating/adjusting entries for the bonds on the consolidating work papers for the year ended December 31, 2012.
Answer:
12/31/2012
Interest ine (8% × $50,000) + ($2,000/5) 4,400
Interest expense(8% × $50,000) - ($1,000/5) 3,800
Gain on retirement of bonds600
Bonds payable50,000
Premium on bonds payable800
Bond investment48,400
Gain on retirement of bonds2,400
Premium on bonds payable:
$1,000 - $1,000/5 =$800
Bond investment:
$48,000 + $2,000/5 = $48,400
Supporting putations:
Book value of bonds
($102,000 × 50%)$51,000
Cost of acquiring $50,000 par (48,000)
Constructive gain3,000
Piecemeal recognition of gain (600)
Unrecognized at December 31, 2012 $ 2,400
Objective: LO2, 3
Difficulty: Difficult
6) Pelami Corporation owns a 90% interest in Sunbird Corporation. At December 31, 2010, Sunbird had $3,000,000 of par value 6% bonds outstanding with an unamortized premium of $30,000. The bonds have interest payment dates of January 1 and July 1 and mature on January 1, 2015.
On January 2, 2011, Pelami purchased $1,200,000 par value of Sunbird's outstanding bonds for $1,210,000. Assume straight-line amortization.
Required:
Prepare the necessary consolidation working paper entries with respect to the interpany bonds for the year ending December 31, 2011.
Answer:
2011 Debit Credit
12/31Bond Interest Payable36,000
Bond Interest Receivable36,000
12/31Premium on Bonds Payable9,000
Bonds Payable1,200,000
Interest Revenue69,500
Interest Expense69,000
Investment in Sunbird Bonds1,207,500
Gain on Retirement of Bonds2,000
Supporting putations:
Cost of bonds to Pelami$1,210,000
Book value acquired
($3,000,000 + $30,000) × 40% = 1,212,000
Gain on constructive bond retirement$2,000
4 years remaining
Premium on Bond Payable
$30,000 x 3/4 × 40%= $9,000
Interest Expense
$1,200,000 × 6% = $ 72,000
Less: $30,000 × 1/4 × 40% = $ 3,000
$ 69,000
Interest Revenue
$72,000 - ($10,000 × 1/4) = $69,500
Objective: LO2, 3
Difficulty: Moderate
7) Spott is a 75%-owned subsidiary of Penthal. On January 1, 2010, Spott issued $900,000 of $1,000 face amount 8% bonds at par. The bonds have interest payments on January 1 and July 1 of each year and mature on January 1, 2014. On July 2, 2011, Penthal purchased all 900 bonds on the open market for $1,020 per bond. Both panies use
straight-line amortization.
Required:
With respect to the bonds, use General Journal format to:
1.Record the 2011 journal entries from July 1 to December 31 on Spott's books.
2.Record the 2011 journal entries from July 1 to December 31 on Penthal's books.
3.Record the elimination entries for the consolidation working papers for the year ending December 31, 2011. Answer:
Requirement 1
Date
2011Account Name DebitCredit
Spott's books
Jul 01 Bond Interest Expense36,000
Cash ($900,000 × 8% ×½)36,000
Dec 31Bond Interest Expense36,000
Bond Interest Payable36,000
Requirement 2
Penthal's books
Jul 02Investment in Spott Bonds918,000
Cash918,000
Dec 31Bond Interest Receivable36,000
Bond Interest Revenue32,400
Investment in Spott Bonds3,600
Requirement 3: Consolidated Working Papers
Dec 31Bond Interest Payable36,000
Bond Interest Receivable36,000
Dec 31Bonds Payable900,000
Loss on Bonds18,000
Bond Interest Revenue32,400
Bond Interest Expense36,000
Investment in Spott Bonds914,400
Interest Revenue:
($900,000 × 8% × 1/2) - ($18,000 premium/5 periods) = $32,400
Objective: LO2, 3
Difficulty: Moderate
8) Snackle Inc. is a 90%-owned subsidiary of Pasha Corp. On January 1, 2010, Snackle issued $400,000 of $1,000 face amount 8% bonds at $964 per bond. Interest is paid on January 1 and July 1 of each year and covers the preceding six months. On July 2, 2011, Pasha purchased all 400 bonds on the open market for $1,030 per bond. The bonds mature on December 31, 2012. Both panies use straight-line amortization.
Required:
With respect to the bonds, use General Journal format to:
1.Record the 2011 journal entries from July 1 to December 31 on Pasha's books.
2.Record the 2011 journal entries from July 1 to December 31 on Snackle's books.
3.Record the elimination entries for the consolidation working papers for the year ending December 31, 2011. Answer:
Date
2011Account Name DebitCredit
Pasha's books
Jul 02Investment in Snackle Bonds412,000
Cash412,000
Dec 31Bond Interest Receivable16,000
Bond Interest Revenue12,000
Investment in Snackle Bonds4,000
Snackle's books
Jul 01Bond Interest Expense18,400
Cash16,000
Discount on Bonds Payable2,400
Dec 31Bond Interest Expense18,400
Bond Interest Payable16,000
Discount on Bonds Payable2,400
Consolidated Working Papers
Dec 31Bond Interest Payable16,000
Bond Interest Receivable16,000
Dec 31Bonds Payable400,000
Loss on Bonds19,200
Bond Interest Revenue12,000
Bond Interest Expense18,400
Discount on Bonds Payable4,800
Investment in Snackle Bonds408,000
(Book value of bonds $392,800 - purchase cost $412,000 = $19,200 loss)
Objective: LO2, 3
Difficulty: Moderate
9) Popcorn Corporation owns 90% of the outstanding voting mon stock of Salty Corporation. On January 1, 2005, Salty issued $1,000,000 face amount of 12%, $1,000 bonds payable at 119.20. The bonds pay interest on January 1 and July 1 of each year and mature on January 1, 2013. On July 2, 2010, Popcorn purchased all of the outstanding bonds at a price of 107.50. Both panies use straight-line amortization.
Required:
1.Prepare the journal entries for July 1, 2010 through December 31, 2010 for Popcorn Corporation.
2..Prepare the journal entries for July 1, 2010 through December 31, 2010 for Salty Corporation.
3.Prepare the elimination entries necessary on the consolidating working papers for the year ended December 31, 2010.
Answer:
Requirement 1
July 2, 2010:
Bond investment1,075,000
Cash1,075,000
December 31, 2010:
Interest receivable60,000
Interest revenue60,000
($1,000,000 × 12% × 1/2)
Interest revenue 15,000
Bond investment 15,000
($75,000/5)
Requirement 2
July 1, 2010:
Interest expense60,000
Cash60,000
Premium on bonds payable12,000
Interest expense12,000
December 31, 2010:
Interest receivable60,000
Interest revenue60,000
($1,000,000 × 12% × 1/2)
IPremium on bonds payable12,000
Interest expense12,000
Requirement 3:
December 31, 2010:
Bonds payable1,000,000
Premium on bonds payable 48,000
Loss on retirement of bonds12,000
Bond investment1,060,000
Bond investment:($1,075,000 - $15,000)
Loss on retirement of bonds3,000
Interest revenu 45,000
Interest expense48,000
Interest payable 60,000
Interest receivable60,000
July 2, 2010
Paid$1,075,000
Book value of bonds1,060,000 [$1,000,000 + ($12,000 × 5)]
Loss on retirement$15,000
Objective: LO2, 3
Difficulty: Moderate
10) Peter Corporation owns a 70% interest in Sundown Corporation acquired several years ago at a price equal to book value and fair value. On December 31, 2010, Sundown had $300,000 par of 6% bonds outstanding with an unamortized premium of $30,000. The bonds mature in five years and pay interest on January 1 and July 1. On January 2, 2011, Peter acquired one-third of Sundown's bonds for $117,000. Peter and Sundown use straight-line amortization. Sundown reports net ine of $250,000 for 2011. Peter uses the equity method to account for the investment.
Required:
1.Calculate Peter's ine from Sundown for 2011.
2.Calculate the noncontrolling interest share for 2011.
Answer:
Preliminary putations:
Book value of bonds $330,000 × 1/3 = $110,000
Cost of bonds 117,000
Loss on constructive retirement$7,000
Requirement 1:
Ine from Sundown:
Share of Sundown's ine ($250,000 × 70%)$175,000
Less: Constructive loss ($7,000 × 70%)(4,900)
Plus: Piecemeal recognition of loss
($7,000/5 years) × 70% 980
Ine from Sundown $171,080
Requirement 2:
Noncontrolling interest share:
Sundown's reported ine$250,000
Less: Constructive loss on bonds(7,000)
Plus: Piecemeal recognition of loss 1,400
Equals: Adjusted reported ine$244,400
Noncontrolling percentage 30%
Noncontrolling interest share$73,320
Objective: LO3, 4
Difficulty: Moderate
11) Pongo pany has $2,000,000 of 6% bonds outstanding on December 31, 2010 with unamortized premium of $60,000. These bonds pay interest semiannually on January 1 and July 1 and mature on January 1, 2016. Straight-line amortization is used.
Syring Inc., 90%-owned subsidiary of Pongo, buys $1,000,000 par value of Pongo's outstanding bonds in the market for $980,000 on January 2, 2011. There is only one issue of outstanding bonds of the affiliated panies and they have consolidated financial statements.
For the year 2011, Pongo has ine from its separate operations (excluding investment ine) of $3,000,000 and Syring reports net ine of $200,000. Pongo uses the equity method to account for the investment.
Required: Determine the following:
1.Noncontrolling interest share for 2011.
2.Controlling share of consolidated net ine for Pongo pany and subsidiary for 2011.
Answer:
Requirement 1
Noncontrolling interest share
($200,000 × 10%)$20,000
Requirement 2
Controlling interest share of consolidated net ine:
Ine from Pongo's operations$3,000,000
Ine from Syring:
Pongo's share of Syring ine = 90% ×
$200,000$180,000
Add: Constructive gain on bond
retirement ($2,000,000 + $60,000) × 50%-
980,00050,000
Less: Piecemeal recognition of gain =
$50,000/5 years(10,000)
220,000
Controlling interest share$3,220,000
Objective: LO2, 4
Difficulty: Moderate
12) Pachelor Corporation owns 70% of the outstanding stock of Stabb pany. On January 1, 2010, Stabb issued $1,000,000 in 7% bonds that matured on January 1, 2015. At the time of issuance, the bonds were sold at a discount of $125,000. At January 2, 2012, Pachelor purchased the bonds for $1,400,000, and constructively retired the debt.。