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

Question 1

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:

A)the subsidiary's net income increased by the gain on constructive retirement of debt.
B)the subsidiary's net income decreased by the loss on constructive retirement of debt.
C)the subsidiary's net income increased by the gain on constructive retirement of debt,and decreased by the subsidiary's bond interest expense.
D)the subsidiary's net income decreased by the loss on constructive retirement of debt,and decreased by the subsidiary's bond interest expense.

Answer 1

A

Question 2

Portuguese owns 80 percent of the common stock of Spanish Company.Portuguese also purchases some of Spanish's bonds directly from Spanish and holds the bonds as a long-term investment.How is the acquisition of the bonds treated for consolidated reporting purposes?

A)As a retirement of bonds.
B)As an increase in the Bonds Payable account on Spanish's books.
C)Everything related to the intercompany bonds is eliminated in the consolidation worksheet,and nothing related to the bonds appears in the consolidated financial statements.
D)As an increase in noncurrent assets.

Answer 2

C

Question 3

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,what amount of investment in bonds will be eliminated in the preparation of the 20X8 consolidated financial statements?

A)$240,500
B)$200,000
C)$245,000
D)$211,500

Answer 3

A

Question 4

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.

A)I
B)II
C)Both I and II
D)Neither I nor II

Question 5

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,premium on bonds payable will be:

A)debited for $45,000 in the consolidating entries.
B)credited for $40,500 in the consolidating entries.
C)debited for $40,500 in the consolidating entries.
D)credited for $45,000 in the consolidating entries.

Question 6

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 amount did Pluto pay when it purchased the bonds on July 1,20X7?

A)$118,020
B)$118,920
C)$118,620
D)$117,220

Question 7

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?

A)$47,900
B)$48,200
C)$49,400
D)$48,800

Question 8

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?

A)$13,000
B)$13,500
C)$10,000
D)$15,000

Question 9

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?

A)75 percent
B)65 percent
C)80 percent
D)95 percent

Question 10

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?

A)As a decrease in the Bonds Payable account on Shepherd's books.
B)As an increase in noncurrent assets.
C)Everything related to the bonds is eliminated in the consolidation worksheet,and nothing related to the bonds appears in the consolidated financial statements.
D)As a retirement of bonds.

Question 11

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?

A)$5,000
B)$6,500
C)$10,000
D)$6,000

Question 12

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 premium on bonds payable will be eliminated in the preparation of the 20X8 consolidated financial statements?

A)$3,500
B)$2,800
C)$5,000
D)$2,500

Question 13

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 was the effect of DEF's purchase of Stamp's bond on the noncontrolling interest amount reported in Stamp's June 30,20X8,consolidated balance sheet?

A)No effect
B)$35,000 increase
C)$8,500 decrease
D)$8,500 increase

Question 14

On January 1,20X6,Pepper Corporation issued 10-year bonds at par to unrelated parties.The bonds pay interest of $15,000 every June 30 and December 31.On December 31,20X9,Salt Corporation purchased all of Pepper's bonds in the open market at a $6,000 discount.Salt is Pepper's 80 percent owned subsidiary.Salt uses the straight-line method of amortization.The consolidated income statement for the year 20X9 should report with respect to the bonds:
I.interest expense of $30,000.
II.a gain of $6,000.

A)I
B)II
C)Either I or II
D)Neither I nor II

Question 15

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?

A)No gain or loss
B)$85,000 gain
C)$85,000 loss
D)$35,000 loss

Question 16

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?

A)Option A
B)Option B
C)Option C
D)Option D

Question 17

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 amount of gain or loss on bond retirement is included in the 20X7 consolidated income statement?

A)$6,600
B)$4,800
C)$6,000
D)$5,400

Question 18

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?

A)$6,000
B)$6,500
C)$5,000
D)$10,000

Question 19

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:

A)debited for $11,500 in the consolidating entries.
B)credited for $11,500 in the consolidating entries.
C)debited for $16,000 in the consolidating entries.
D)credited for $16,000 in the consolidating entries.

Question 20

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.

A)I
B)II
C)I and III
D)I,II,and III

Question 21

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.

Question 22

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 price did Peanut pay to purchase the Snoopy bonds?

A)$530,000
B)$516,875
C)$533,750
D)$550,625

Question 23

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?

A)$163,750
B)$161,250
C)$146,250
D)$148,750

Question 24

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 gain or loss on bond retirement will be reported in the 20X8 consolidated financial statements?

A)$17,000 loss
B)$12,800 loss
C)$18,500 gain
D)$22,200 gain

Question 25

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 January 1,20X8,for $122,000.Pumpkin owns 75 percent of Spice's voting common stock.
Based on the information given above,what amount of interest income will be eliminated in the preparation of the 20X9 consolidated financial statements?

A)$17,000
B)$13,300
C)$18,500
D)$22,200

Question 26

A subsidiary issues bonds.The parent can then acquire the bonds either directly from the subsidiary or from a nonaffiliate that had originally acquired the subsidiary's bonds.
Required:
a)Discuss the parent's accounting as it relates to the preparation of consolidated financial statements,for their acquisition of the bonds:
1.from the nonaffiliate.
2.directly from the subsidiary.
b)Why does it matter who the bonds are acquired from?

Question 27

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.

Question 28

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 interest income will be eliminated in the preparation of the 20X9 consolidated financial statements?

A)$17,000
B)$13,300
C)$18,500
D)$22,200

Question 29

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?

A)$10,750
B)$9,500
C)$2,500
D)$12,000

Question 30

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 January 1,20X8,for $122,000.Pumpkin owns 75 percent of Spice's voting common stock.
Based on the information given above,what amount of premium on bonds payable will be eliminated in the preparation of the 20X8 year-end consolidated financial statements?

A)$3,500
B)$2,800
C)$5,000
D)$2,500

Question 31

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 interest expense will be eliminated in the preparation of the 20X9 consolidated financial statements?

A)$17,000
B)$13,300
C)$18,500
D)$22,200

Question 32

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.

Question 33

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?

A)$533,750
B)$516,875
C)$545,000
D)$550,625

Question 34

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?

A)$4,925
B)$5,550
C)$5,625
D)$4,625

Question 35

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 income does Scissor record for 20X8?

A)$12,000
B)$2,500
C)$7,500
D)$9,500

Question 36

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 January 1,20X8,for $122,000.Pumpkin owns 75 percent of Spice's voting common stock.
Based on the information given above,what amount of gain or loss on bond retirement will be reported in the 20X8 consolidated financial statements?

A)$17,000
B)$12,800
C)$18,500
D)$22,200

Question 37

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 premium on bonds payable will be eliminated in the preparation of the 20X9 consolidated financial statements?

A)$3,500
B)$2,800
C)$5,000
D)$2,500

Question 38

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.

Question 39

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 gain or loss on the retirement of bonds should be reported in the 20X8 consolidated income statement?

A)$6,250 gain
B)$7,500 gain
C)$7,500 loss
D)$6,250 loss

Question 40

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 January 1,20X8,for $122,000.Pumpkin owns 75 percent of Spice's voting common stock.
Based on the information given above,what amount of premium on bonds payable will be eliminated in the preparation of the 20X9 year-end consolidated financial statements?

A)$3,500
B)$2,800
C)$5,000
D)$2,500