Chapter 7 12ge

Advanced Accounting, 12e, Global Edition (Beams et al.
)
Chapter 7 Intercompany Profit Transactions - Bonds
7.1 Multiple Choice Questions
1) If the price paid by a parent company 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 intercompany bond liability at
the time of purchase is
A) always assigned to the parent company 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
1
2015 Pearson Education Limited
3) Bonds issued by a company remain on their books as a liability, but are considered constructively
retired when
A) the company borrows money from unaffiliated entities to re-purchase its own bonds at a gain.
B) The company borrows money from an affiliate to re-purchase its own bonds at a gain.
C) The company's parent or subsidiary purchases the bonds from outside entities.
D) The company 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 Company owns a 90% interest in Sapp Company. On January 1, 2013, Pascalian had $300,000,
6% bonds outstanding with an unamortized premium of $9,000. The bonds mature on December 31, 2017.
Sapp acquired one-third of Pascalian's bonds in the open market for $97,000 on January 1, 2013. Both
companies use straight-line amortization of bond discounts/premiums. Interest is paid on December 31.
On December 31, 2013, the books of the two affiliates held the following balances:
Pascalian's books
6% bonds payable
Premium on bonds
Interest expense
$300,000
7,200
16,200
Sapp's books
Investment in Pascalian bonds
Interest income
$ 97,600
6,600
4) The gain from the bond purchase that appeared on the December 31, 2013 consolidated income
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
2
5) Consolidated Interest Expense and consolidated Interest Income, respectively, that appeared on the
consolidated income statement for the year ended December 31, 2013 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
6) Prussia Corporation owns 80% the voting stock of Stad Corporation. On January 1, 2013, Prussia paid
$391,000 cash for $400,000 par of Stad's 10% $1,000,000 par value outstanding bonds, due on April 1, 2018.
Stad's bonds had a book value of $1,045,000 on January 1, 2013. Straight-line amortization is used. The
gain or loss on the constructive retirement of $400,000 of Stad bonds on January 1, 2013 was reported in
the 2013 consolidated income statement in the amount of
A) $14,000.
B) $21,600.
C) $23,000.
D) $27,000.
Answer: D
Objective: LO2

Pfadt Inc. had $600,000 par of 8% bonds payable outstanding on January 1, 2013 due January 1, 2017 with
an unamortized discount of $12,000. Senat is a 90%-owned subsidiary of Pfadt. On January 2, 2013, 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 income statement of Pfadt Corporation and
Subsidiary for 2013 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
3
8) Bond Interest Receivable for 2013 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
9) Bonds Payable appeared in the December 31, 2013 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

Plenty Corporation issued six thousand, $1,000 par, 6% bonds on January 1, 2012, at par. Interest is paid
on January 1 and July 1 of each year; the bonds mature on January 1, 2017. On January 2, 2014, 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 income for 2014 included the annual interest expense for all 3,000 bonds.
Scrawn's separate net income for 2014 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 companies use straight-line
amortization of bond discounts/premiums.
10) What was the amount of gain or (loss) from the intercompany purchase of Plenty's bonds on January
2, 2014?
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
4
11) If the bonds were originally issued at 106, and 80% of them were purchased by Scrawn on January 2,
2015 at 98, the gain or (loss) from the intercompany purchase was
A) $(384,000).
B) $(211,200).
C) $ 211,200.
D) $ 384,000.
Answer: C
Explanation: C) Book value at January 2, 2015 equals
$6,360,000 minus $216,000 =
$6,144,000
Percentage of bonds acquired
80%
Equals book value acquired
4,915,200
Purchase price 4,800 bonds $980 =
4,704,000
Gain on constructive retirement =
$ 211,200
Objective: LO2
12) If the bonds were originally issued at 103, and 70% of them were purchased on January 2, 2016 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, 2016 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
$ 142,800
Objective: LO2
13) Using the original information, the amount of consolidated Interest Expense for 2014 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
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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, 2015 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, 2015 will be the interest on bonds held by non-affiliates or $3,000,000 6% 1/2 year
Objective: LO2, 3
15) Using the original information, the elimination entries on the consolidation working papers prepared
on December 31, 2014 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
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 company issued the bonds.
Answer: D
Objective: LO1
Difficulty: Easy
6
18) Pickle Incorporated acquired a $10,000 bond originally issued by its 80%-owned subsidiary on
January 2, 2013. The bond was issued in a prior year for $11,250, matures January 1, 2018, and pays 9%
interest at December 31. The bond's book value at January 2, 2013 is $10,625, and Pickle paid $9,500 to
purchase it. Straight-line amortization is used by both companies. How much interest income should be
eliminated in 2013?
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

Poe Corporation owns an 80% interest in Seri Company acquired at book value several years ago. On
January 2, 2013, 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, 2016. Straight-line amortization is used. Separate incomes of
Poe and Seri for 2013 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 income for 2013 was
A) $443,600.
B) $444,000.
C) $444,400.
D) $448,000.
Answer: B
Explanation: B) Poe's separate income
$ 350,000
Income 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
20) Noncontrolling interest share for 2013 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
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7.2 Exercises
1) Separate company and consolidated income statements for Pitta and Sojourn Corporations for the year
ended December 31, 2013 are summarized as follows:
Sales Revenue
Income from Sojourn
Bond interest income
Gain on bond retirement
Total revenues
Cost of sales
Bond interest expense
Other expenses
Total expenses
Consolidated net income
Noncontrolling interest share
Separate net income and
Control. interest share in
consolidated net income
Pitta
$ 500,000
19,900
Soujourn
$ 100,000
519,900
106,000
$ 280,000
9,000
120,900
409,900
$ 50,000
31,000
81,000
$ 330,000
3,600
151,900
485,500
117,500
7,500
$ 110,000
$ 25,000
$ 110,000
6,000
Consolidated
$ 600,000
3,000
603,000
The interest income and expense eliminations relate to a $100,000, 9% bond issue that was issued at par
value and matures on January 1, 2018. On January 2, 2013, a portion of the bonds was purchased and
constructively retired.
Required: Answer the following questions.
1. Which company 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 income statement for 2013?
3. What portion of the bonds payable is held by nonaffiliates at December 31, 2013?
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 income from Sojourn.
Answer: 1.
Pitta is the issuing affiliate.
2.
Effect on consolidated net income:

Gain on constructive retirement of bonds
$ 3,000
3. Percent of bonds held by nonaffiliates at December 31, 2013 is 40%, computed 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 income of Sojourn = 30%
noncontrolling interest.)
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5.
6.
Straight-line amortization
$100,000 par 60% purchased
Purchase price 5 years before maturity
Gain
$60,000
57,000
3,000
Nominal interest ($60,000 9%)

Discount amortization ($3,000/5 years)
Bond interest income
$ 5,400
600
$ 6,000
Pitta's income from Sojourn

Share of Sojourn's reported income
($25,000 70%) =
Add: Constructive gain
Less: Piecemeal recognition of constructive
gain
Income from Sojourn
$17,500
3,000
(600)
$19,900
Objective: LO1, 2, 4
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2) Platts Incorporated purchased 80% of Scarab Company several years ago when the fair value equaled
the book value. On January 1, 2013, 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, 2014, Platts purchased all of Scarab's bonds for $96,000.
Required:
1. Prepare the journal entries in 2014 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, 2014.
Answer:
Requirement 1:
Platts entries:
1/1/14
Investment in bonds
$96,000
Cash
$96,000
12/31/14
Cash
8,000
Interest income
Investment in bonds
Interest income
1,000
Scarab entries:
12/31/14 Interest expense
Cash
Requirement 2:
Consolidating entries:
12/31/14 Bonds payable
Investment in bonds
Gain on retirement of debt
Interest income
Interest expense
Gain on retirement of debt
Objective: LO2, 3
8,000
100,000
9,000
8,000
1,000
8,000
97,000
3,000
8,000
1,000
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3) Paka Corporation owns an 80% interest in Sandra Company. Paka acquired Sandra's bonds on January
2, 2014. The following information is from the adjusted trial balances at December 31, 2014, 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 companies.
Investment in Sandra Bonds, $100,000 par

7% Bonds payable, $200,000
Bond premium
Interest expense
Interest receivable
Interest income
Interest payable
Paka
98,500
7,000
7,500
Sandra
200,000
6,000
12,000
7,000
Required:
Prepare the necessary consolidation working paper entries on December 31, 2014 with respect to the
intercompany bonds.
Answer: 2014
Debit
Credit
12/31 Bond Interest Payable
7,000
Bond Interest Receivable
7,000
12/31 Bonds Payable
100,000
Interest Income
7,500
Bond premium
3,000
Interest Expense (50% owned)
6,000
Investment in Sandra's Bonds
98,500
Gain on retirement of bonds
6,000
Supporting Computations:
Cost of bonds to Paka ($98,500 - $500)
Book value acquired 1/1/2014 where
$2,000 per year is amortized
($200,000 + $8,000) 50% =
Gain on constructive bond retirement
Objective: LO2, 3
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$98,000
104,000
$6,000
4) Pheasant Corporation owns 80% of Sal Corporation's outstanding common stock that was purchased at
book value equal to fair value on January 1, 2007.
Additional information:
1. Pheasant sold inventory items that cost $3,000 to Sal during 2014 for $6,000. One-half of this
merchandise was inventoried by Sal at year-end. At December 31, 2014, Sal owed Pheasant $2,000 on
account from the inventory sales. No other intercompany 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, 2012. 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, 2014, 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, 2018. 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:
Complete the working papers to consolidate the financial statements of Pheasant Corporation and Sal for
the year ended December 31, 2014.
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13
Answer:
Objective: LO2, 3
Difficulty: Difficult
14
5) Phauna paid $120,000 for its 80% interest in Schrub on January 1, 2011 when Schrub had $150,000 of
total stockholders' equity.
On January 1, 2014, 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, 2018. 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, 2014.
Answer: 12/31/2014
Interest income (8% $50,000) + ($2,000/5) 4,400
Interest expense(8% $50,000) - ($1,000/5)
3,800
600
Bonds payable
Premium on bonds payable
Bond investment
50,000
800
48,400
2,400
Premium on bonds payable:

$1,000 - $1,000/5 = $800
Bond investment:
$48,000 + $2,000/5 = $48,400
Supporting computations:
Book value of bonds
($102,000 50%)
Cost of acquiring $50,000 par
Constructive gain
Piecemeal recognition of gain
Unrecognized at December 31, 2014
Objective: LO2, 3
Difficulty: Difficult
15
$51,000
(48,000)
3,000
(600)
$ 2,400
6) Pelami Corporation owns a 90% interest in Sunbird Corporation. At December 31, 2012, 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, 2017.
On January 2, 2013, 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 intercompany bonds for
the year ending December 31, 2013.
Answer: 2013
Debit
Credit
12/31 Bond Interest Payable
36,000
36,000
12/31
Premium on Bonds Payable

9,000
Bonds Payable
1,200,000
Interest Revenue
69,500
Interest Expense
Investment in Sunbird Bonds
Gain on Retirement of Bonds
Supporting Computations:
Cost of bonds to Pelami
Book value acquired
($3,000,000 + $30,000) 40% =
Gain on constructive bond retirement
4 years remaining
Premium on Bond Payable
$30,000 3/4 40%
$9,000
Interest Expense
$1,200,000 6%
Less: $30,000 1/4 40%
=
=
Interest Revenue
$72,000 - ($10,000 1/4)
$ 72,000
$ 3,000
$ 69,000
$69,500
Objective: LO2, 3
69,000
1,207,500
2,000
$1,210,000
1,212,000
$2,000
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7) Spott is a 75%-owned subsidiary of Penthal. On January 1, 2013, 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, 2017. On July 2, 2014, Penthal purchased all 900 bonds on the open market for $1,020
per bond. Both companies use straight-line amortization.
Required: With respect to the bonds, use General Journal format to:
1. Record the 2014 journal entries from July 1 to December 31 on Spott's books.
2. Record the 2014 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,
2014.
Answer:
Requirement 1
Date
2014
Account Name
Debit
Credit
Spott's books
Jul 01
Bond Interest Expense
36,000
Cash ($900,000 8% )
36,000
Dec 31

Bond Interest Payable
36,000
Requirement 2
Penthal's books
Jul 02
Investment in Spott Bonds
Cash
Dec 31
918,000

Bond Interest Revenue
Requirement 3: Consolidated Working Papers

Dec 31
Dec 31
Bonds Payable
Loss on Bonds
36,000
36,000
900,000
18,000
32,400
36,000
918,000
32,400
3,600
36,000
36,000
914,400
Interest Revenue:
($900,000 8% 1/2) - ($18,000 premium/5 periods) = $32,400
Objective: LO2, 3
17
8) Snackle Inc. is a 90%-owned subsidiary of Pasha Corp. On January 1, 2013, 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, 2014, Pasha purchased all 400 bonds on the open market for
$1,030 per bond. The bonds mature on December 31, 2015. Both companies use straight-line amortization.
1. Record the 2014 journal entries from July 1 to December 31 on Pasha's books.
2. Record the 2014 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,
2014.
Answer: Date
2014
Account Name
Debit
Credit
Pasha's books
Jul 02
Investment in Snackle Bonds
412,000
Cash
412,000
Dec 31

Snackle's books
Jul 01
Cash
Discount on Bonds Payable
Dec 31

Consolidated Working Papers

Dec 31
Dec 31
Bonds Payable
Loss on Bonds
16,000
18,400
18,400
16,000
400,000
19,200
12,000
12,000
4,000
16,000
2,400
16,000
2,400
16,000
18,400
4,800
408,000
(Book value of bonds $392,800 - purchase cost $412,000 = $19,200 loss)

Objective: LO2, 3
18
9) Popcorn Corporation owns 90% of the outstanding voting common stock of Salty Corporation. On
January 1, 2009, 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, 2017. On July 2, 2014, Popcorn
purchased all of the outstanding bonds at a price of 107.50. Both companies use straight-line amortization.
Required:
1. Prepare the journal entries for July 1, 2014 through December 31, 2014 for Popcorn Corporation.
2. Prepare the journal entries for July 1, 2014 through December 31, 2014 for Salty Corporation.
3. Prepare the elimination entries necessary on the consolidating working papers for the year ended
December 31, 2014.
Answer:
Requirement 1
July 2, 2014:
Bond investment
1,075,000
Cash
1,075,000
December 31, 2014:
Interest receivable
Interest revenue
($1,000,000 12% 1/2)
Interest revenue
Bond investment
($75,000/5)
Requirement 2
July 1, 2014:
Interest expense
Cash
Interest expense
December 31, 2014:
Interest receivable
Interest revenue
($1,000,000 12% 1/2)
Interest expense
60,000
15,000
60,000
12,000
60,000
12,000
60,000
15,000
60,000
12,000
60,000
12,000
19
Requirement 3:
December 31, 2014:
Bonds payable
Loss on retirement of bonds
Bond investment
Bond investment:($1,075,000 - $15,000)
1,000,000
48,000
12,000

Interest revenue
Interest expense
3,000
45,000
Interest payable
Interest receivable
60,000
1,060,000
48,000
60,000
July 2, 2014
Paid
$1,075,000
Book value of bonds 1,060,000 [$1,000,000 + ($12,000 5)]
Loss on retirement
$15,000
Objective: LO2, 3
20
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, 2013, 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, 2014, Peter acquired one-third of Sundown's bonds for $117,000. Peter
and Sundown use straight-line amortization. Sundown reports net income of $250,000 for 2014. Peter uses
the equity method to account for the investment.
Required:
1. Calculate Peter's income from Sundown for 2014.
2. Calculate the noncontrolling interest share for 2014.
Answer: Preliminary computations:
Book value of bonds $330,000 1/3 =
$110,000
Cost of bonds
117,000
$7,000
Requirement 1:
Income from Sundown:
Share of Sundown's income ($250,000 70%)
Less: Constructive loss ($7,000 70%)
Plus: Piecemeal recognition of loss
($7,000/5 years) 70%
Income from Sundown
Requirement 2:
Noncontrolling interest share:
Sundown's reported income
Less: Constructive loss on bonds
Plus: Piecemeal recognition of loss
Equals: Adjusted reported income
Noncontrolling percentage
Objective: LO3, 4
$175,000
(4,900)
980
$171,080
$250,000
(7,000)
1,400
$244,400
30%
$73,320
21
11) Pongo Company has $2,000,000 of 6% bonds outstanding on December 31, 2013 with unamortized
premium of $60,000. These bonds pay interest semiannually on January 1 and July 1 and mature on
January 1, 2019. 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, 2014. There is only one issue of outstanding bonds of the affiliated
companies and they have consolidated financial statements.
For the year 2014, Pongo has income from its separate operations (excluding investment income) of
$3,000,000 and Syring reports net income of $200,000. Pongo uses the equity method to account for the
investment.
Required:
Determine the following:
1. Noncontrolling interest share for 2014.
2. Controlling share of consolidated net income for Pongo Company and subsidiary for 2014.
Answer: Requirement 1
($200,000 10%)
$20,000
Requirement 2
Controlling interest share of consolidated net income:
Income from Pongo's operations
Income from Syring:
Pongo's share of Syring income = 90%
$200,000
$180,000
Add: Constructive gain on bond
retirement ($2,000,000 + $60,000) 50% 980,000
50,000
Less: Piecemeal recognition of gain =
$50,000/5 years
(10,000)
Controlling interest share
Objective: LO2, 4
$3,000,000
220,000
$3,220,000
22
12) Pachelor Corporation owns 70% of the outstanding stock of Stabb Company. On January 1, 2013,
Stabb issued $1,000,000 in 7% bonds that matured on January 1, 2018. At the time of issuance, the bonds
were sold at a discount of $125,000. At January 2, 2015, Pachelor purchased the bonds for $1,400,000, and
constructively retired the debt. Interest is paid annually on January 1. Straight-line amortization is used
by both companies.
Required:
1. Calculate the gain or loss that the consolidated entity incurred to retire the debt.
2. Prepare eliminating/adjusting entries for the consolidating work papers for the year ended
December 31, 2015.
Answer: Requirement 1:
Book value of bonds at time of retirement =
($1,000,000 - $125,000 + [($125,000 / 5 years) 2]) =
$ 925,000
Purchase price of bonds =
1,400,000
Constructive loss on retirement of bonds
$ 475,000
Requirement 2:
December 31, 2015:
Interest payable
Interest receivable
($1,000,000 7%)
70,000

316,667
Bonds payable
1,000,000
Discount on bonds payable
Bond investment
(Bond investment: $1,400,000 - $400,000/3)
(Bond discount: $25,000 2)
70,000
50,000
1,266,667

158,333
Interest expense
95,000
Interest income
63,333
Interest expense:
[($1,000,000 7%) + $125,000/5] = $70,000 + $25,000 = $95,000
Interest income:
($400,000/3) - ($1,000,000 7%) = $133,333 - $70,000 = $63,333 (Debit balance)
Objective: LO2, 3
23
13) Padma Corporation owns 70% of the outstanding stock of Somega Company. On January 1, 2012,
Somega issued $2,000,000 in 6% bonds that matured on January 1, 2022. At the time of issuance, the
bonds were sold at a premium of $250,000. At January 1, 2013, Padma purchased half of the bonds for
$910,000, and constructively retired the debt. Annual interest is paid on December 31. Straight-line
amortization is used by both companies.
Required:
Complete the table below with respect to the account balances that Padma, Somega and the consolidated
entity would report on their respective financial statements.
Padma
Somega
Investment in Somega bonds

12/31/12
12/31/13
12/31/14
Bonds Payable 12/31/12
Premium on Bonds Payable 12/31/12
Gain/(loss) on Retirement 12/31/12
Interest Income 12/31/12
Interest Expense 12/31/12
24
Consolidated
Answer:
Padma
12/31/12
12/31/13
12/31/14
Somega
Consolidated
-0-
-0-
-0-
920,000
-0-
-0-
930,000
-0-0-0-0-0-0-0-0-0-070,000
70,000
-0-0-0-
-02,000,000
2,000,000
2,000,000
225,000
200,000
175,000
-0-0-0-0-0-095,000
95,000
95,000
-02,000,000
1,000,000
1,000,000
225,000
100,000
87,500
-0202,500
-0-0-0-095,000
47,500
47,500
Objective: LO2, 3
25
14) Patama Holdings owns 70% of Seagull Corporation. On January 1, 2013, Seagull acquires $1,000,000 of
bonds originally issued by Patama on January 1, 2008. The bonds were issued at a stated rate of 5% for 10
years, for $960,000. Seagull purchased them for $990,000. Assume that both Patama and Seagull will use
the straight-line method for any bond-related amortization. Annual interest is paid on December 31.
Required:
Complete the table below with respect to the account balances that Patama, Seagull and the consolidated
entity would report on their respective financial statements.
Patama
Seagull
Investment in Patama bonds

12/31/12
12/31/13
Investment in Patema bonds
12/31/14
Discount on Bonds Payable 12/31/12
26
Consolidated
Answer:
Patama
12/31/12
12/31/13
Investment in Patema bonds
12/31/14
Seagull
Consolidated
-0-
-0-
-0-
-0-
992,000
-0-
-01,000,000
1,000,000
1,000,000
20,000
16,000
12,000
-0-0-0-0-0-054,000
54,000
54,000
994,000
-0-0-0-0-0-0-0-0-0-052,000
52,000
-0-0-0-
-01,000,000
-0-020,000
-0-0-0(10,000)
-0-0-0-054,000
-0-0-
Objective: LO2
27
15) Parkview Holdings owns 70% of Skyline Corporation. On January 1, 2013, Skyline acquires half of the
$2,000,000 of bonds originally issued by Parkview on January 1, 2008. The bonds were issued at a stated
rate of 5% for 10 years, for $1,920,000. Skyline purchased them for $950,000. Assume that both Parkview
and Skyline will use the straight-line method for any bond-related amortization. Annual interest is paid
on December 31.
Required: Prepare the entries required for the consolidating worksheet for the years ended December 31,
2008 through December 31, 2018.
Answer: 12/31/08 - 12/31/12: No consolidating worksheet entry required because bonds are held by a
third-party.
12/31/13 Bonds Payable
$1,000,000
Interest Income
60,000
Investment in Parkview Bonds
Interest Expense
Gain on Bond constructive retirement
$960,000
16,000
54,000
30,000

Interest Income
Interest Expense
Investment in Skyline Stock
$1,000,000
60,000
$970,000
12,000
54,000
24,000

Interest Income
Interest Expense
$1,000,000
60,000

Interest Income
Interest Expense
$1,000,000
60,000

Interest Income
Interest Expense
$1,000,000
60,000
Objective: LO2, 3
$980,000
8,000
54,000
18,000
$990,000
4,000
54,000
12,000
$1,000,000
54,000
6,000
28
16) Paleo Corporation holds 80% of the capital stock of Sockrite Company. On January 1, 2013, Sockrite
purchased $50,000 par value, 10% bonds on the open market that had been issued by Paleo on January 1,
2011. Sockrite paid $58,000 for these bonds which had originally been issued by Paleo for $53,000, with a
10-year maturity from the date of issue. Interest is paid annually on December 31. Straight-line
amortization is used by both companies.
Required:
1. Calculate the interest income reported by Sockrite related to these bonds in 2013.
2. Calculate the interest expense reported by Paleo related to these bonds in 2013.
3. Calculate the gain or loss on retirement of bonds payable to be reported on consolidated financial
statements in 2013.
Answer: 1. Interest income = ($50,000 10%) - ($8,000 / 8) = $4,000
2. Interest expense = ($50,000 10%) - ($3,000 / 10) = $4,700
3. Loss= Book value - amount paid = ($53,000 - $600) - $58,000 = $5,600
Objective: LO2
Difficulty: Easy
29
17) Phlora purchased its 100% ownership in Speshal many years ago at a time when book values of assets
and liabilities equaled market values.
On January 2, 2014, Phlora purchased $200,000 of Speshal Corporation's 6% bonds for $182,000. At that
time, this was all of the bonds that had been issued by Speshal, and unamortized premium on Speshal's
books was $3,500. The bonds pay interest on July 1 and January 1 and mature on January 1, 2019. Both
Phlora and Speshal use straight-line amortization. Phlora uses the equity method of accounting for its
investment in Speshal.
Speshal reported the following for 2014:
Net income
$38,000
Dividends
$10,000
Required:
Prepare elimination/adjusting entries on the consolidating work papers for the year ended December 31,
2014.
Answer: Interest payable
6,000
Interest receivable
6,000
($200,000 6% 1/2)
Bonds payable
Bond investment
(Premium: $3,500 - $3,500/5)
(Bond investment: $182,000 + $18,000/5)
200,000
2,800
Interest income
15,600
Interest expense
[Interest income: ($200,000 6%) + ($18,000/5)]
[Interest expense: ($200,000 6%) - ($3,500/5)]
Income from subsidiary
Dividends
Investment in subsidiary
55,200
185,600
17,200
11,300
4,300
10,000
45,200
Income from subsidiary:($38,000 + $21,500 - $21,500/5)

January 2, 2014:
Paid
Book value
Gain on retirement
Objective: LO2, 3
$182,000
$203,500
$ 21,500
30
18) Sabu is a 65%-owned subsidiary of Peerless. On January 1, 2012, Sabu issued $1,000,000 of $1,000 face
amount 8% bonds at $980 per bond. The bonds have interest payments on December 31 of each year and
mature on January 1, 2017. On January 1, 2013, Peerless purchased all 1,000 bonds on the open market for
$1,010 per bond. Straight-line amortization is used by both companies.
1. Record the journal entries on Sabu's books made from 2012 to 2017.
2. Record the journal entries on Peerless' books made from 2012 to 2017.
3. Record the elimination entries for the consolidation working papers for 2012 through 2017.
Answer:
Requirement 1
Date
Account Name
Sabu's Books
1/1/12
Cash
Bond Discount
Bonds Payable
12/31/12
Debit
980,000
20,000
Interest Expense
Cash
Interest Expense
Bond Discount
80,000
4,000
12/31/13
Same as entry for prior year end
12/31/14
12/31/15
12/31/16
1/1/17
Bonds Payable
Cash
1,000,000
Credit
1,000,000
80,000
4,000
1,000,000
Requirement 2
Peerless Books
2012
No entry
1/1/13
12/31/13
12/31/14
Investment in Bonds
Cash
Cash
Interest Income
Interest Income
Investment in Bonds
1,010,000
80,000
2,500
1,010,000
80,000
2,500

31
12/31/15
12/31/16
1/1/17
Cash
Investment in Bonds
1,000,000
1,000,000
Requirement 3
2012
No entry required bonds owned by third party
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
Bonds Payable
Interest Income
Loss on Bond Retirement
Investment in Bonds
Interest Expense
Bond Discount
1,000,000
77,500
26,000
Bonds Payable
Interest Income
Investment in Sabu
Noncontrolling interest
Investment in Bonds
Interest Expense
Bond Discount
1,000,000
77,500
12,675
6,825
Bonds Payable
Interest Income
Investment in Sabu
Investment in Bonds
Interest Expense
Bond Discount
1,000,000
77,500
8,450
4,550
Bonds Payable
Interest Income
Investment in Sabu
Investment in Bonds
Interest Expense
1,000,000
77,500
4,225
2,275
1,007,500
84,000
12,000
1,005,000
84,000
8,000
1,002,500
84,000
4,000
1,000,000
84,000
No entry required
Objective: LO2, 3
32
19) Pare Corporation owns 65% of the outstanding voting stock of Summer Corporation. On January 1,
2013, Pare purchased $4,000,000 of bonds that were originally issued by Summer several years earlier. The
ten-year bonds have a 5% interest rate, and pay interest each December 31.
The bonds were originally issued at a discount of $206,080, but at January 1, 2013, they have a book value
of $3,896,960. Pare paid $4,067,935 for the bonds and will amortize the premium over the next five years
when the bonds mature. Both companies use the straight-method of amortization.
Required:
1. Calculate the interest expense for 2013 that will be recorded by Summer.
2. Calculate the interest income for 2013 that will be recorded by Pare.
3. Calculate the Gain/Loss on retirement of bonds payable that will be reported on the consolidated
financial statements for the year ending December 31, 2013.
Interest expense = ($4,000,000 5%) + ($103,040 / 5) = $220,608
Requirement 2
Interest income = ($4,000,000 5%) - ($67,935 / 5) = $186,413
Requirement 3
Loss = Book value - amount paid = $3,896,960 - $4,067,935 = ($170,975)
Objective: LO2, 3
Difficulty: Easy
33
20) Pass Corporation owns 80% of Sindy Company, purchased at the underlying book value on January 1,
2013. On January 1, 2013, Pass also purchased $200,000 par value 6% bonds that had been issued by
Sindy on January 1, 2010 with a ten-year maturity(due January 1, 2020). Annual interest is paid on
December 31. Straight-line amortization is used by both companies.
At year-end 2013, the following entry was made on the consolidating worksheet.
Bonds Payable
Bond Premium
Loss on Bond Retirement
Interest Income
Investment in Sindy Bonds
Interest Expense
$200,000
12,000
7,000
(a)
$218,000
(b)
Required:
1. How much did Pass pay for the bonds?
2. What is the book value of the bonds on the date of purchase?
3. What amount of interest income and interest expense must be eliminated in the entry above
designated as (a) and (b)?
Bonds issued 1/1/10 and mature 1/1/20, so at time of purchase, seven years remain. At 12/31/13 (time
of entry shown above), six years remain.
Pass shows an investment of $218,000 at 12/31/13. Assuming that the $18,000 premium will be written
off over the six years that remain, the premium amortization is $3,000 per year. Thus at the beginning of
2013 (the date of purchase), the premium would have been $21,000, indicating that Pass paid $221,000.
Requirement 2
If the bond premium remaining at 12/31/13 is $12,000, then the premium remaining at the time of
purchase(1/1/13) by Pass was $14,000($12,000 + $2,000 annual amortization). Thus the book value at the
time of purchase was $214,000.
Requirements 3 and 4
Interest income = ($200,000 6%) - ($18,000 / 6) = $9,000
Interest expense = ($200,000 6%) - ($12,000 / 6) = $10,000
Objective: LO2, 3
34

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Chapter 7 12ge

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Advanced Accounting, 12e, Global Edition (Beams et al.

Use the following information to answer the question(s) below.

Use the following information to answer the question(s) below.

Use the following information to answer the question(s) below.

Use the following information to answer the question(s) below.

20) Noncontrolling interest share for 2013 was

Effect on consolidated net income:

Nominal interest ($60,000 9%)

Pitta's income from Sojourn

Investment in Sandra Bonds, $100,000 par

Premium on bonds payable:

Premium on Bonds Payable

Bond Interest Expense

Bond Interest Receivable

Requirement 3: Consolidated Working Papers

Bond Interest Receivable

Bond Interest Expense

Consolidated Working Papers

(Book value of bonds $392,800 - purchase cost $412,000 = $19,200 loss)

Loss on retirement of bonds

Loss on retirement of bonds

Loss on retirement of bonds

Investment in Somega bonds

Investment in Patama bonds

12/31/14 Bonds Payable

12/31/15 Bonds Payable

12/31/16 Bonds Payable

12/31/17 Bonds Payable

Income from subsidiary:($38,000 + $21,500 - $21,500/5)

Same as entry for prior year end

Same as entry for prior year end

Same as entry for prior year end

Same as entry for prior year end

Same as entry for prior year end

Same as entry for prior year end

Same as entry for prior year end

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