Chapter 8, Problem 8.16P

a.

To determine

Introduction: When an intercompany sale of bonds takes place between affiliates, all effects of intercompany obligations must be eliminated for the purpose of consolidated financial statements. A company cannot report an investment in its own bonds or bond liability to itself. Thus, when the consolidated entity is viewed as a single company all amounts related to intercompany indebtedness are eliminated.

The journal entries for 20X3 in P’s books related to its investment in S’s stocks and bonds.

Explanation of Solution

Date/20X3		Debit $	Credit $
	To record receipt of interest on bond investment
Jan 1	Cash	2,000
	Interest receivable		2,000
	(Received cash on account of half yearly investment in bonds)
July 1	To record receipt of bond interest
	Cash	2,000
	Investment in S company bonds	250
	Interest income		2,250
	(Received cash on account of half yearly investment in bonds)
Dec 31	To record dividends for S
	Cash	7,000
	Investment in S company stock		7,000
	(Received cash dividends from S)
	To record accrued interest income
	Interest receivable	2,000
	Investment in S company bonds	250
	Interest income		2,250
	(Half yearly interest receivable recognized)
	To record income
	Investment in S Company stock	21,000
	Income from subsidiary		21,000
	(Income from investment in S recognized)
	To record amortization differential
	Income from subsidiary	2,800
	Investment in S company stock		2,800
	(Amortization of differential recognized)

1. Interest on bond semiannually $\left(\text{\$50,000}\times \text{0}\text{.08}\right)\times \text{6/12 = \$2,000}$ . Is received and debited to cash account.
2. $\text{Amortization of bond premium }\left(\text{\$50,000 – 45,000}\right)\text{ =5,000}$ $\text{Semiannual recognition \$5,000/20}\text{=}\text{\$250}$

Debited to investment in S company bonds.

3. Dividends from S company $10,000, parental share of 0.70 is $\text{Parents}\text{share}\text{of}\text{dividends}\text{transferred \$10,000}\times \text{0}\text{.70 = 7,000}$
4. $\text{To record equity method income \$30,000}\times \text{0}\text{.70}\text{=}\text{\$21,000}\text{debited to S company stock}$

$\text{Amortization differential is }\left(\text{\$56,000 / 14 years}\right)\times \text{0}\text{.70 = \$2,800}$

b

To determine

Introduction: When an intercompany sale of bonds takes place between affiliates, all effects of intercompany obligations must be eliminated for the purpose of consolidated financial statements. A company cannot report an investment in its own bonds or bond liability to itself. Thus when the consolidated entity is viewed as a single company all amounts related to intercompany indebtedness are eliminated.

The entries in S’s books related to bond issue.

Explanation of Solution

		Debit $	Credit $
Jan 1	To record the interest payment
	Interest payable	4,000
	Cash		4,000
	(Paid cash on account of half yearly interest expense)
July 1	To record semiannual interest payment and bond Amortization
	Interest expenses	4,500
	Discount on bonds payable		500
	Cash		4,000
	(Paid cash on account of half yearly interest and discount on bonds recognized)
Dec 31
	Interest expenses	4,500
	Discount on bonds payable		500
	Cash		4,000
	(Paid cash on account of half yearly interest and discount on bonds recognized)

1. Interest payment recognized $\left(\$100,000x0.08\right)/2 =\$4,000$
2. Bond discount payable $\$10,000/20instalments =\$500$ credited and recognized as bond expense.
3. Semiannual interest payment and bond discount recognized.

c

To determine

Introduction: When an intercompany sale of bonds takes place between affiliates, all effects of intercompany obligations must be eliminated for the purpose of consolidated financial statements. A company cannot report an investment in its own bonds or bond liability to itself. Thus when the consolidated entity is viewed as a single company all amounts related to intercompany indebtedness are eliminated.

Elimination entries for 20X3 needed for consolidation

Explanation of Solution

	Debit	Credit
Eliminate income form subsidiary
Income from subsidiary	18,200
Dividends declared		7,000
Investment in S company stock		11,200
(Income from subsidiary eliminated by reversal)
Assign income to non-controlling interest
Income to non-controlling interest	7,800
Dividends declared		3,000
Non-controlling interest		4,800
(Income assigned to non-controlling interest)
Elimination of beginning investment
Common stock S company	50,000
Retained earnings January 1	100,000
Differential	48,000
Investment in S company stock		138,600
Non-controlling interest		59,400
(Beginning investment in S company stock eliminated by reversal)
Assign differential to record amortization
Land, buildings and equipment	44,000
Operating expenses	4,000
Differential		48,000
(Differential on assigned to land and buildings)
Elimination of inter-company bond holding
Bonds payable	50,000
Interest income	4,500
Investment in S company bonds		46,500
Interest expense		4,500
Discount on bonds payable		3,500
(Intercompany bond holdings eliminated by reversal)
Elimination of intercompany receivable/payable
Interest payable	2,000
Interest receivable		2,000
(Intercompany receivable and payable eliminated)
Elimination of profit on intercompany sale of land
Retained earnings January 1	5,600
Non-controlling interest	2,400
Land, buildings and equipment		8,000
(Profit on sale of intercompany sale of land eliminated)

1. Income from subsidiary eliminated by reverse entry $\$18,200\left(\$21,000–2,800\right)$ amortization of differential) $\text{Dividends}\text{= }\$7,000\left(10,000\times .70\right)$ and investment $11,200
2. Assignment of income to $\text{Non-controlling interest \$7,800}\left[\text{\$30,000 –}\left(\text{\$56,000/14 years}\right)\right]\times \text{.30}$

$\text{Dividends \$3,000}\left(\text{\$10,000}\times \text{.30}\right)$ non-controlling interest $4,800

3. Elimination of beginning investment

$\text{Differential }\$48,000(\$56,000–\left(\$4,000\times 2years\right)$

$\text{Investment in S company stock \$138,600 }\left(\text{\$50,000 + \$100,000 + \$48,000}\right)\times \text{.70}$

$\text{Non-controlling interest \$59,400 }\left(\text{\$50,000 + \$100,000 + \$48,000}\right)\text{×}\text{.30}$

4. $\text{Assign differential on land buildings and equipment \$44,000}\left(\text{\$56,000 -\$4,000 }\times \text{3 years}\right)$

$\text{Eliminate intercompany bond holding Investment \$46,500( \$45,000+}\left(\text{250}\times \text{6 periods}\right)$

$\text{Discount on bond payable \$3,500}\left(\text{\$7,000 /2}\right)$

5. Elimination of intercompany receivable and payable by setoff entry
6. Intercompany sale of land eliminated by reversing the transaction.

d

To determine

Introduction: When an intercompany sale of bonds takes place between affiliates, all effects of intercompany obligations must be eliminated for the purpose of consolidated financial statements. A company cannot report an investment in its own bonds or bond liability to itself. Thus when the consolidated entity is viewed as a single company all amounts related to intercompany indebtedness are eliminated.

The preparation of consolidation worksheet for 20X2

Answer to Problem 8.16P

Consolidated retained earnings and total assets as per consolidated worksheet $277,200 and $855,200 respectively.

Explanation of Solution

P and S

Consolidation worksheet

December 31 20X3

			Eliminations
	P $	S $	Debit $	Credit $	Consolidation $
Sales	300,000	200,000			500,000
Interest income	4,500		4,500
Income from subsidiary	18,200		18,200
Less: operating expenses	(198,500)	(161,000)	4,000		(363,500)
Interest expenses	(27,000)	(9,000)		4,500	(31,500)
Consolidated net income					105,000
Income to NCI			7,800		(7,800)
Net income	97,200	30,000	34,500	4,500	97,200
Retained earnings January 1	244,400	100,000	100,000
			5,600		238,800
Net income	97,200	30,000	34,500	4,500	97,200
Dividends declared	(60,000)	(10,000)		7,000
				3,000	(60,000)
Retained earnings December 31	281,600	120,000	140,100	14,400	276,000
Cash and Receivables	30,300	46,000		2,000	74,300
Inventory	170,000	70,000			240,000
Land, buildings & equipment	320,000	180,000	44,000	8,000	536,000
Discount on bond payable		7,000		3,500	3,500
Investment in V company
Stock	149,800			11,200
				138,600
Bonds	46,500			46,500
Differential			48,000	48,000
Total Assets	716,600	303,000			853,800
Current liabilities	35,000	33,000	2,000		66,000
Bonds payable	300,000	100,000	50,000		350,000
Common stock	100,000	50,000	50,000		100,000
Retained earnings	281,600	120,000	140,100	14,500	276,000
Non-controlling interest			2,400	4,800
				59,400	61,800
Total Equity and Liability	716,600	303,000	244,500	78,700	853,800