Exam 5: Intercompany Transactions: Bonds and Leases

On January 1, 2019, Parent Company purchased 90% of the common stock of Subsidiary Company for $450,000.On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $20,000, $130,000, and $200,000, respectively.Any excess of cost over book value is due to goodwill.Parent accounts for the Investment in Subsidiary using the cost method. ? On January 1, 2019, Subsidiary sold $100,000 par value of 6%, ten-year bonds for $97,000.The bonds pay interest semi-annually on January 1 and July 1 of each year. ? On January 1, 2021, Parent repurchased all of Subsidiary's bonds for $96,400.The bonds are still held on December 31, 2021. ? Both companies have correctly recorded all entries relative to bonds and interest, using straight-line amortization for premium or discount. ? Required: ? Complete the Figure 5-4 worksheet for consolidated financial statements for the year ended of December 31, 2021.Round all computations to the nearest dollar. ?

The Park Company owns 80% of the outstanding common stock of the Sea Company.Park is about to lease a machine with a 5-year life to the Sea Company.The lease would begin January 1, 2016. ? Required: ? Explain the adjustments that will be required in the consolidation process if each of the following occurs. ? a.The lease is an operating lease.? ? b.The lease is a direct financing lease with a bargain purchase option.? ? c.The lease is a sales-type lease with a bargain purchase option.?

Intercompany debt that must be eliminated from consolidated financial statements may result from:

On January 1, 2019, Parent Company purchased 90% of the common stock of Subsidiary Company for $360,000.On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $20,000, $130,000, and $200,000 respectively.Any excess of cost over book value is due to goodwill.Parent account for the Investment in Subsidiary using the simple equity method. ? On July 1, 2019, Subsidiary sold $100,000 par value of 9%, ten-year bonds for $106,755, which resulted in an effective interest rate of 8%.The bonds pay interest semi-annually on January 1 and July 1 of each year.Subsidiary uses the effective-interest method of amortizing the premium. ? An amortization table for 2019 and 2021 is presented below: ? ? Date Cash Int Interest Exp Premium Amort Premium Bal Carrying Value 7/1/19 6,755 106,755 12/31/19 4,500 4,270 230 6,525 106,525 7/1/21 4,500 4,261 239 6,286 106,286 12/31/21 4,500 4,251 249 6,037 106,037 On July 1, 2021, Parent repurchased all of Par's bonds for $94,153, which resulted in an effective interest rate of 10%.The bonds are still held at year end. ? Both companies have correctly recorded all entries relative to bonds and interest.The balance in the Investment in Subsidiary Bonds account is $94,361 at December 31, 2021, and the parent recognized interest income of $4,708 during the period. ? Required: ? Prepare the eliminating entries pertaining to the intercompany purchase of bonds for the year ending December 31, 2021. ?

Park owns an 80% interest in the common stock of Stable Company.Park leased a machine to Stable under a 5-year, direct financing lease with a bargain purchase option.The lease term began January 1, 2019.The impact of the lease on the Non-controlling share of income for 2019:

In the year when one member of a consolidated group purchases from outside parties the bonds of another affiliate, the consolidated income statement includes:

Sun Company is a 100%-owned subsidiary of Peter Company.On January 1, 2016, Sun Company has $500,000 of 8% face rate bonds outstanding, with an unamortized discount of $5,000 that is being amortized over a 5 year remaining life to maturity.On that date, Peter Company purchased the bonds for $497,000.The adjustment to the consolidated income of the two companies needed in the consolidation process for 2017 (the following year) is ____.

Company S is a 100%-owned subsidiary of Company P.On January 1, 2019, Company S has $200,000 of 8% face rate bonds outstanding, which were issued at face value.The bonds had 5 years to maturity on January 1, 2019.Premiums or discounts would be amortized on a straight-line basis.On that date, Company P purchased the bonds for $198,000.The amount on the consolidated balance sheet relative to the debt is:

Soap Company issued $200,000 of 8%, 5-year bonds on January 1, 2016.The discount on issuance was $12,000.Bond interest is paid annually on December 31.On December 31, 2018, Pumice Company purchased one-half of the outstanding bonds for $96,000.Both companies use the straight-line method of amortization. ​ How much interest expense will appear on the December 31, 2019, consolidated income statement?

Under a sales-type lease between affiliated companies, how does the lessor treat the intercompany profit at the inception of the lease?

On January 1, 2019, Parent Company purchased 90% of the common stock of Subsidiary Company for $360,000.On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $20,000, $130,000, and $200,000, respectively.Any excess of cost over book value is due to goodwill.Parent accounts for the Investment in Subsidiary using the simple equity method. ​ On January 1, 2019, Subsidiary sold $100,000 par value of 6%, ten-year bonds for $97,000.The bonds pay interest semi-annually on January 1 and July 1 of each year. ​ On January 1, 2021, Parent repurchased all of Subsidiary's bonds for $96,400.The bonds are still held on December 31, 2021. ​ Both companies have correctly recorded all entries relative to bonds and interest, using straight-line amortization for premium or discount. ​ Required: ​ Prepare the eliminating entries pertaining to the intercompany purchase of bonds for the year ended December 31, 2021. ​

Powell Company owns an 80% interest in Sauter, Inc.On January 1, 2016, Sauter issued $400,000 of 10-year, 12% bonds at a premium of $50,000.On December 31, 2021, 5 years after original issuance, Powell purchased all of the outstanding bonds for $390,000.Both firms use the straight-line method of amortization. ​ What is the gain on retirement on the 2021 consolidated income statement? ​

Powell Company owns an 80% interest in Sauter, Inc.On January 1, 2016, Sauter issued $400,000 of 10-year, 12% bonds at a premium of $50,000.On December 31, 2021, 5 years after original issuance, Powell purchased all of the outstanding bonds for $390,000.Both firms use the straight-line method of amortization. ​ The interest adjustment in the 2021 subsidiary income distribution schedule is ____.

On January 1, 2016, Parent Company purchased 80% of the common stock of Subsidiary Company for $402,000.On this date Subsidiary had total owners' equity of $440,000.Any excess of cost over book value is due to goodwill.Parent accounts for its investment in Subsidiary using the simple equity method. ? On January 1, 2016, Parent held merchandise acquired from Subsidiary for $50,000.During 2016, Subsidiary sold merchandise to Parent for $120,000, of which Parent holds $30,000 on December 31, 2016.Subsidiary's gross profit on sales is 40%.On December 31, 2016, Parent still owes Subsidiary $5,000 for merchandise. ? On December 31, 2016, Parent sold $100,000 par value of 11%, 10-year bonds for $106,232, which resulted in an effective interest rate of 10%.The bonds pay interest semi-annually on June 30 and December 31.Parent uses the effective-interest method of amortization for the premium. ? An amortization table for 2017 and 2016 is presented below: ? ? Cash Interest Premium Premium Debt Interest Expense Amortization Balance Carrying Value 12/31/16 6,232 106,232 6/30/17 5,500 5,312 (188) 6,044 106,044 12/31/17 5,500 5,302 (198) 5,846 105,846 6/30/16 5,500 5,292 (208) 5,638 105,638 12/31/16 5,500 5,282 (218) 5,420 105,420 On December 31, 2017, Subsidiary repurchased $50,000 par value of the bonds, paying a price equal to par.The bonds are still held on December 31, 2016. ? On December 31, 2016, Parent sold equipment with a cost of $50,000 and accumulated depreciation of $30,000 to Subsidiary for $40,000.Subsidiary will use the equipment beginning in 2019. ? Required: ? Complete the Figure 5-7 worksheet for consolidated financial statements for the year ended December 31, 2016.Round all computations to the nearest dollar. ?

Which of the following statements is true?

The usual impetus for transactions that create a long-term debtor-creditor relationship between members of a consolidated group is due to the:​

The parent company leased a machine to its subsidiary using a direct-financing lease that included a bargain purchase option.As a result of the intercompany lease, the following items should be eliminated in the consolidation process: ? $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Depreciation }$ Machine Debt Interest Expense A) Yes Yes Yes Yes B) Yes Yes Yes No C) Yes No No No D) No Yes Yes No

On January 1, 2016 Parent Company acquired 90% of the common stock of Subsidiary Company for $360,000.On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $50,000, $100,000, and $200,000 respectively.Any excess of cost over book value is due to goodwill.Parent accounts for the Investment in Subsidiary using the simple equity method. ​ On January 1, 2017, Parent purchased equipment for $204,110 and immediately leased the equipment to Subsidiary on a 4-year lease.The minimum lease payments of $60,000 are to be made annually on January 1, beginning immediately, for a total of 4 payments.The implicit interest rate is 12%.The lease provides for an automatic transfer of title at the end of 4 years.The estimated useful life of the equipment is 6 years.The lease has been capitalized by both companies.The lease amortization schedule is presented below: ​ ​ Required: ​ Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-10 partial worksheet as of December 31, 2017.Key and explain all eliminations and adjustments. ​ ​ ​

On January 1, 2016, Pope Company acquired 100% of the common stock of Siegel Company for $300,000.On this date Siegel had total owners' equity of $250,000.Any excess of cost over book value is attributable to goodwill.Pope accounts for its investment in Siegel using the simple equity method. ? Also on July 1, 2016, Siegel Company sold to outside investors $200,000 par value of 10-year, 10% bonds.The price received was equal to par.The bonds pay interest semi-annually on July 1 and January 1. ? During early 2019, market interest rates on bonds similar to those issued by Siegel decreased to 8%.As a result, the market value of the bonds increased.On July 1, 2019, Pope purchased $100,000 par value of Siegel's bonds, paying $112,695.Pope still holds the bonds on December 31, 2019 and has amortized the premium, using the effective-interest method which has resulted in interest income of $4,508 and a balance in the Investment in Subsidiary Bonds account of $112,203. ? Required: ? Prepare the eliminating entries pertaining to the intercompany purchase of the bonds for the year ended December 31, 2019.

Company S is a 100%-owned subsidiary of Company P.Company S has outstanding 6%, 10-year bonds sold to yield 7%.On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at a price that reflected the current 9% effective interest rate.How should this event be reflected in the current year's consolidated statements?