Several years ago, Penston Company purchased 90 percent of the outstanding shares of Swansan Corporation. Penston made the acquisition because Swansan produced a vital component used in Penston’s manufacturing process. Penston wanted to ensure an adequate supply of this item at a reasonable price. The former owner, James Swansan, retained the remaining 10 percent of Swansan’s stock and agreed to continue managing thisorganization. He was given responsibility for the subsidiary’s daily manufacturing operations but not for any financial decisions.Swansan’s takeover has proven to be a successful undertaking for Penston. The subsidiary has managed to supply all of the parent’s inventory needs and distribute a variety of items to outside customers.At a recent meeting, Penston’s president and the company’s chief financial officer began discussing Swansan’s debt position. The subsidiary had a debt-to-equity ratio that seemed unreasonably high considering the significant amount of cash flows being generated by both companies. Payment of the interest expense, especially on the subsidiary’s outstanding bonds, was a major cost, one that the corporate officials hoped to reduce. However, the bond indenture specified that Swansan could retire this debt prior to maturity only by paying 107 percent of face value.This premium was considered prohibitive. Thus, to avoid contractual problems, Penston acquired a large portion of Swansan’s liability in the open market for 101 percent of face value. Penston’s purchase created an effective loss of $300,000 on the debt, the excess of the price over the carrying amount of the debt, as reported on Swansan’s books.Company accountants currently are computing the noncontrolling interest’s share of consolidated net income to be reported for the current year. They are unsure about the impact of this $300,000 loss. The subsidiary’s debt was retired, but officials of the parent company made the decision. Who lost this $300,000?
The Effect Of Prepaid Taxes On Assets And Liabilities
Many businesses estimate tax liability and make payments throughout the year (often quarterly). When a company overestimates its tax liability, this results in the business paying a prepaid tax. Prepaid taxes will be reversed within one year but can result in prepaid assets and liabilities.
Final Accounts
Financial accounting is one of the branches of accounting in which the transactions arising in the business over a particular period are recorded.
Ledger Posting
A ledger is an account that provides information on all the transactions that have taken place during a particular period. It is also known as General Ledger. For example, your bank account statement is a general ledger that gives information about the amount paid/debited or received/ credited from your bank account over some time.
Trial Balance and Final Accounts
In accounting we start with recording transaction with journal entries then we make separate ledger account for each type of transaction. It is very necessary to check and verify that the transaction transferred to ledgers from the journal are accurately recorded or not. Trial balance helps in this. Trial balance helps to check the accuracy of posting the ledger accounts. It helps the accountant to assist in preparing final accounts. It also helps the accountant to check whether all the debits and credits of items are recorded and posted accurately. Like in a balance sheet debit and credit side should be equal, similarly in trial balance debit balance and credit balance should tally.
Adjustment Entries
At the end of every accounting period Adjustment Entries are made in order to adjust the accounts precisely replicate the expenses and revenue of the current period. It is also known as end of period adjustment. It can also be referred as financial reporting that corrects the errors made previously in the accounting period. The basic characteristics of every adjustment entry is that it affects at least one real account and one nominal account.
Several years ago, Penston Company purchased 90 percent of the outstanding shares of Swansan
Corporation. Penston made the acquisition because Swansan produced a vital component used
in Penston’s manufacturing process. Penston wanted to ensure an adequate supply of this item at a reasonable price. The former owner, James Swansan, retained the remaining 10 percent of Swansan’s stock and agreed to continue managing thisorganization. He was given responsibility for the subsidiary’s daily manufacturing operations but not for any financial decisions.
Swansan’s takeover has proven to be a successful undertaking for Penston. The subsidiary has managed to supply all of the parent’s inventory needs and distribute a variety of items to outside customers.
At a recent meeting, Penston’s president and the company’s chief financial officer began discussing Swansan’s debt position. The subsidiary had a debt-to-equity ratio that seemed unreasonably high considering the significant amount of cash flows being generated by both companies. Payment of the interest expense, especially on the subsidiary’s outstanding bonds, was a major
cost, one that the corporate officials hoped to reduce. However, the bond indenture specified that Swansan could retire this debt prior to maturity only by paying 107 percent of face value.This premium was considered prohibitive. Thus, to avoid contractual problems, Penston acquired a large portion of Swansan’s liability in the open market for 101 percent of face value. Penston’s purchase created an effective loss of $300,000 on the debt, the excess of the price over the carrying amount of the debt, as reported on Swansan’s books.
Company accountants currently are computing the noncontrolling interest’s share of consolidated net income to be reported for the current year. They are unsure about the impact of this $300,000 loss. The subsidiary’s debt was retired, but officials of the parent company made the decision. Who lost this $300,000?
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