Exam 21: Intercompany Indebtednessfully Adjusted Equity Method Using Straight-Line Interest Amortization

Postage,a holder of a $400,000 Stamp Inc.bond,collected the interest due on June 30,20X8,and then sold the bond to DEF Inc.for $365,000.On that date the bond issuer,Stamp,a 90 percent owner of DEF,had a $450,000 carrying amount for this bond. -Based on the information given above,what amount of gain or loss on bond retirement was recorded?

Sydney Company issued $1,000,000 par value 10-year bonds at 102 on January 1,20X5,which Melbourne Corporation purchased.The coupon rate on the bonds is 9 percent.Interest payments are made semiannually on July 1 and January 1.On July 1,20X8,Perth Company purchased $500,000 par value of the bonds from Melbourne for $492,200.Perth owns 65 percent of Sydney's voting shares. Required: a.What amount of gain or loss will be reported in Sydney's 20X8 income statement on the retirement of bonds? b.Will a gain or loss be reported in the 20X8 consolidated financial statements for Perth for the constructive retirement of bonds? What amount will be reported? c.How much will Perth's purchase of the bonds change consolidated net income for 20X8? d.Prepare the worksheet consolidation entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31,20X8. e.Prepare the worksheet consolidation entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31,20X9.

Puget Corporation owns 80 percent of Sound Company's voting shares.On January 1,20X7,Sound sold bonds with a par value of $300,000 at 95.Puget purchased two thirds of the bonds;the remainder was sold to nonaffiliates.The bonds mature in ten years and pay an annual interest rate of 6 percent.Interest is paid semiannually on January 1 and July 1. -Based on the information given above,what amount of interest expense should be reported in the 20X8 consolidated income statement?

On January 1,20X7,Passport Company acquired 60 percent of the outstanding common stock of Stamp Company at the book value of the shares acquired.On that date,the fair value of noncontrolling interest was equal to 40 percent of book value of Stamp.At the time of purchase,Stamp had common stock of $1,000,000 outstanding and retained earnings of $800,000. On December 31,20X7,Passport purchased 50 percent of Stamp's bonds outstanding which were originally issued on January 2,20X4,at 99.The total bond issue has a face value of $600,000,pays 10 percent interest annually,and has a 10-year maturity.Any premium or discount is amortized on a straight-line basis.Passport paid $306,000 for its investment in Stamp's bonds and intends to hold the bonds until maturity. Income and dividends for Passport and Stamp for 20X7 and 20X8 are as follows: b.Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X8.

Poodle Company owns 80 percent of the common stock of Shepherd Inc.Poodle acquires some of Shepherd's bonds from an unrelated party for less than the carrying value on Shepherd's books and holds them as a long-term investment.For consolidated reporting purposes,how is the acquisition of Shepherd's bonds treated?

On January 1,20X7,Passport Company acquired 60 percent of the outstanding common stock of Stamp Company at the book value of the shares acquired.On that date,the fair value of noncontrolling interest was equal to 40 percent of book value of Stamp.At the time of purchase,Stamp had common stock of $1,000,000 outstanding and retained earnings of $800,000. On December 31,20X7,Passport purchased 50 percent of Stamp's bonds outstanding which were originally issued on January 2,20X4,at 99.The total bond issue has a face value of $600,000,pays 10 percent interest annually,and has a 10-year maturity.Any premium or discount is amortized on a straight-line basis.Passport paid $306,000 for its investment in Stamp's bonds and intends to hold the bonds until maturity. Income and dividends for Passport and Stamp for 20X7 and 20X8 are as follows: b.Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X8.

A loss on the constructive retirement of a parent's bonds by a subsidiary is effectively recognized in the individual accounting records of the parent and its subsidiary: I.at the date of constructive retirement. II.over the remaining term of the bonds.

Puget Corporation owns 80 percent of Sound Company's voting shares.On January 1,20X7,Sound sold bonds with a par value of $300,000 at 95.Puget purchased two thirds of the bonds;the remainder was sold to nonaffiliates.The bonds mature in ten years and pay an annual interest rate of 6 percent.Interest is paid semiannually on January 1 and July 1. -Based on the information given above,what amount of interest expense will be eliminated in the preparation of the 20X8 consolidated financial statements?

Puget Corporation owns 80 percent of Sound Company's voting shares.On January 1,20X7,Sound sold bonds with a par value of $300,000 at 95.Puget purchased two thirds of the bonds;the remainder was sold to nonaffiliates.The bonds mature in ten years and pay an annual interest rate of 6 percent.Interest is paid semiannually on January 1 and July 1. -Based on the information given above,what amount of interest receivable will be recorded by Puget Corporation on December 31,20X8,in its separate financial statements?

At the end of the year,a parent acquires a wholly owned subsidiary's bonds from unaffiliated parties at a cost less than the subsidiary's carrying value.The consolidated net income for the year of acquisition should include the parent's separate operating income plus:

On January 1,20X7,Passport Company acquired 60 percent of the outstanding common stock of Stamp Company at the book value of the shares acquired.On that date,the fair value of noncontrolling interest was equal to 40 percent of book value of Stamp.At the time of purchase,Stamp had common stock of $1,000,000 outstanding and retained earnings of $800,000. On December 31,20X7,Passport purchased 50 percent of Stamp's bonds outstanding which were originally issued on January 2,20X4,at 99.The total bond issue has a face value of $600,000,pays 10 percent interest annually,and has a 10-year maturity.Any premium or discount is amortized on a straight-line basis.Passport paid $306,000 for its investment in Stamp's bonds and intends to hold the bonds until maturity. Income and dividends for Passport and Stamp for 20X7 and 20X8 are as follows: b.Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X8.

Which of the following statements is (are)correct? I.The amount assigned to the noncontrolling interest may be affected by a constructive retirement of bonds. II.A constructive retirement of bonds normally results in a gain or loss. III.In constructive retirement,the entity would still consider the bonds outstanding,even though they are treated as if they were retired in preparing consolidated financial statements.

Saturn Corporation issued $300,000 par value 10-year bonds at 107 on January 1,20X3,which Star Corporation purchased.On July 1,20X7,Pluto Corporation purchased $120,000 face value of Saturn bonds from Star.The bonds pay 12 percent interest annually on December 31.The preparation of consolidated financial statements for Saturn and Pluto at December 31,20X9,required the following consolidation entry: -Based on the information given above,if 20X9 consolidated net income of $50,000 would have been reported without the consolidation entry provided,what amount will actually be reported?

Paper Corporation holds 80 percent of the voting shares of Scissor Company.On January 1,20X8,Scissor purchased $100,000 par value 12 percent first mortgage bonds of Paper from Cruse for $115,000.Paper originally issued the bonds to Cruse on January 1,20X6,for $110,000.The bonds have an 8-year maturity from the date of issue.Scissor's reported net income of $65,000 for 20X8,and Paper reported income (excluding income from ownership of Scissor's stock)of $90,000. -Based on the information given above,what amount of consolidated net income should be reported for 20X8?

Pancake Corporation owns 85 percent of Syrup Corporation's voting shares.On January 1,20X8,Pancake Corporation sold $200,000 par value 8 percent bonds to Syrup for $245,000.The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. -Based on the information given above,in the preparation of the 20X8 consolidated financial statements,interest income will be:

Saturn Corporation issued $300,000 par value 10-year bonds at 107 on January 1,20X3,which Star Corporation purchased.On July 1,20X7,Pluto Corporation purchased $120,000 face value of Saturn bonds from Star.The bonds pay 12 percent interest annually on December 31.The preparation of consolidated financial statements for Saturn and Pluto at December 31,20X9,required the following consolidation entry: -Based on the information given above,what percentage of the subsidiary's ownership does the parent company hold?

Peanut Corporation acquired 80 percent of Snoopy Company's voting shares on January 1,20X8,at underlying book value.On that date,it also purchased $500,000 par value 8 percent Snoopy bonds,which had been issued on January 1,20X5,with a 12-year maturity.During preparation of the consolidated financial statements for December 31,20X8,the following consolidating entry was made in the worksheet: -Based on the information given above,what was the carrying amount of the bonds on Snoopy's books on the date of purchase?

Paper Corporation holds 80 percent of the voting shares of Scissor Company.On January 1,20X8,Scissor purchased $100,000 par value 12 percent first mortgage bonds of Paper from Cruse for $115,000.Paper originally issued the bonds to Cruse on January 1,20X6,for $110,000.The bonds have an 8-year maturity from the date of issue.Scissor's reported net income of $65,000 for 20X8,and Paper reported income (excluding income from ownership of Scissor's stock)of $90,000. -Based on the information given above,what amount of interest expense does Paper record annually?

Spice Company issued $200,000 of 10 percent first mortgage bonds on January 1,20X4,at 105.The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.Pumpkin Corporation purchased $140,000 of Spice's bonds from the original purchaser on December 31,20X8,for $125,000.Pumpkin owns 75 percent of Spice's voting common stock. -Based on the information given above,what amount of constructive gain will be allocated to noncontrolling interest in 20X8 consolidated financial statements?

When one company purchases the debt of an affiliate from an unrelated party,a gain or loss on the constructive retirement of debt is recognized by which of the following?