Exam 5: Intercompany Transactions: Bonds and Leases

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. ? On July 1, 2016, Siegel Company sold to outside investors $300,000 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 $150,000 par value of Siegel's bonds, paying $163,000.Pope still holds the bonds on December 31, 2019 and has amortized the premium, using the straight-line method. ? Required: ? Complete the Figure 5-1 worksheet for consolidated financial statements for the year ended December 31, 2019.Round all computations to the nearest dollar. ? ? ?

To eliminate intercompany bonds and interest expense of consolidated companies, Company P (Parent) and Company S (Subsidiary) which of the following is correct?

Leasing subsidiaries are formed to achieve centralized asset management through leasing to affiliated firms, and when they are consolidated with the parent, they are consolidated​

In years subsequent to the year one member of a consolidated group purchases another member's outstanding bonds from outside parties, Consolidated Income Statements:​

When one member of a consolidated group purchases only part of the outstanding bonds of another member of the group (for example, 80% of the bonds),

The purchase of outstanding subsidiary bonds by the parent company has the same impact on consolidated statements as:​

Company S is a 100%-owned subsidiary of Company P.Company P purchased, at a premium, Company S bonds that are outstanding and have a remaining discount.Consolidation theory takes the position that:

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 6% effective interest rate.How should this event be reflected in the current year's consolidated statements?

The Planes Company owns 100% of the outstanding common stock of the Sands Company.Sands issued $100,000 of face value, 9%, 10-year bonds on January 1, 2016, for $96,000.The discount is being amortized on a straight-line basis.On January 1, 2018, Planes purchased all the bonds as an investment for $95,000. ? Required: ? Be specific in answering the following questions and include numerical explanations. ? a.How will this bond issue be recorded and accounted for in 2018 on the separate books of Planes and Sands? ? ? b.How will this bond issue be accounted for on the 2018 consolidated statements? ? ? c.How will this bond issue be recorded and accounted for in 2019 on the separate books of Planes and Sands? ? ? d.How will this bond issue be accounted for on the 2019 consolidated statements?

Phil Company leased a machine to its 100%-owned subsidiary, Scout Company.The direct financing lease required annual lease payments in advance of $2,319 for 5 years.The present value of the minimum lease payments at 8% interest is $10,000.The adjustment needed to arrive at consolidated net income for the first year after the lease is ____.

When there is an unguaranteed residual value for the lessor in a direct-financing lease, this means:

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 bond interest expense will appear on the December 31, 2018, consolidated income statement?

Consolidation procedures for sales-type leases:

When a parent buys subsidiary bonds:​