Chapter 8, Problem 8.26AP

a

To determine

Introduction: When an affiliate of the issuer later acquires bonds from an unrelated party, the bonds are retired at the time of purchase. The bonds are not held outside the consolidated entity once another company within the consolidated entity purchases them, it must be treated as repurchase by the debtor. The acquisition of an affiliate’s bonds by another company within affiliated entities is referred to as constructive retirement. Although bonds are not actually retired.

The consolidation entries needed for December 31, 20X8, consolidation worksheet.

Explanation of Solution

Particulars	Debit $	Credit $
Eliminate income from subsidiary
Income from subsidiary	22,500
Dividends declared		7,500
Investment in S company stock		15,000
(Income from subsidiary eliminated by reversal)
Assign income to non-controlling interest
Income to non-controlling interest	7,650
Dividends declared		2,500
Non-controlling interest		5,150
(Income assigned to non-controlling interest)
Eliminate beginning investment balance
Common stock S company	30,000
Additional Paid-in capital	20,000
Retained earnings January 1	150,000
Investment in S company stock		150,000
Non-controlling interest		50,000
(Beginning investment in intercompany bonds eliminated)
Eliminate unrealized profit on buildings
Buildings and equipment	60,000
Retained earnings, January 1	15,000
Depreciation expenses		1,500
Accumulated depreciation		73,500
(Unrealized profit on buildings and equipment eliminated)
Eliminate unrealized profit on land
Retained earnings, January 1	9,750
Non-controlling interest	3,250
Land		13,000
(Unrealized profit on land eliminated)
Eliminate intercompany bond holdings
Bonds payable	40,000
Interest income	3,600
Retained earnings, January 1	3,150
Non-controlling interest	1,050
Investment in S company bonds		42,400
Interest expenses		4,200
Bond discount		1,200
(Intercompany bond holding eliminated by reversal)
Eliminate intercompany receivables and payables
Interest and other payables	2,000
Interest and other receivables		2,000
(Intercompany receivables and payables eliminated)

1. Income from subsidiary is eliminated by reverse entry

Income from subsidiary $\$22,500\left(\$30,000\times .75\right)dividends\$7,500\left(\$10,000\times .75\right)$

2. Assignment of income to non-controlling interest by debit $\$7,650=\left(\$30,000+600\right)\times .25$ and credit Dividends $\$2,500=\left(\$10,000\times .25\right)$ and non-controlling interest.
3. Eliminate beginning investment by reverse entry by debit in common stock, additional paid-in capital and retained earnings and credit investment in S $\$150,000=\left(\$200,000\times .75\right)$ and $\text{Non-controlling interest \$50,000 =}\left(\text{\$200,000}\times \text{.25}\right)$
4. $\text{Unrealized profit on building is eliminated building and equipment \$60,000 =}\left(\text{\$125,000 - \$65,000}\right)$

$\text{Retained earnings \$15,000 = (\$65,000 –}\left(\text{\$125,000 - \$75,000}\right)$ , $\text{Depreciation expense \$1,500 = }\left(\text{\$65,000 /10 years}\right)\text{–}\left(\text{\$125,000 /25 years}\right)$

$\text{Accumulated depreciation \$73,500 = }\left(\text{\$5,000 }\times \text{16 years}\right)\text{ – }\left(\text{ 6,500}\right)$

5. $\text{Unrealized profit on sale of land \$13,000 = }\left(\text{\$35,000 - \$22,000}\right)$

$\text{Retained}\text{Earnings}\text{January}\text{\$9,750 =}\left(\text{ \$13,000 ×}\text{.75}\right)$ and

$\text{Non-controlling interest}\$3,250\left(\$13,000\times .25\right)$

Intercompany bond investment eliminated by reverse entry.

$\text{Interest}\text{income}\text{\$3,600 =}\left(\text{\$40,000 ×}\text{.10}\right)\text{ –}\left(\text{2,800 /7 years}\right)$

$\text{Retained earnings}\text{\$3,150 =}\left(\text{\$42,800 –38,600}\right)\text{×}\text{.75}$

$\text{Non-controlling interest}\text{\$1,050 =}\left(\text{\$42,800 – 38,600}\right)\text{×}\text{.25}$ ,

$\text{Investment in S company stock \$42,400 = (\$42,800 –}\left(\text{\$2,800/7 years}\right)\text{,}$

$\text{Interest expense}\$4,200=\left(\$40,000\times .10\right)+\left(2,000/10years\right)$ ,

Bond discount. $\text{Bond discount}\text{\$1,200 =}\left(\text{ 2,000/10 years}\right)\text{×}\text{.6 years}$

6. Intercompany receivables and payables eliminated by setoff entry.

b

To determine

Introduction: When an affiliate of the issuer later acquires bonds from an unrelated party, the bonds are retired at the time of purchase. The bonds are not held outside the consolidated entity once another company within the consolidated entity purchases them, it must be treated as repurchase by the debtor. The acquisition of an affiliate’s bonds by another company within affiliated entities is referred to as constructive retirement. Although bonds are not actually retired.

The preparation of consolidation worksheet for 20X8

Answer to Problem 8.26AP

Consolidated retained earnings for December 31, 20X8 $279,550 and total assets, liabilities and equity $1,478,900

Explanation of Solution

P and Subsidiary

Consolidation work sheet

December 31 20X8

			Eliminations
	P $	S $	Debit $	Credit $	Consolidations $
Sales	450,000	250,000			700,000
Income from subsidiary	22,500		22,500
Interest income	18,500		3,600		14,900
Less: cost of goods sold	(285,000)	(136,000)			(421,000)
Operating expenses	(50,000)	(40,000)			(90,000)
Depreciation expenses	(35,000)	(24,000)		1,500	(57,500)
Interest expenses	(24,000)	(10,500)		4,200	(30,300)
Miscellaneous expenses	(11,900)	(9,500)			(21,400)
Consolidated net income					94,700
Income to NCI			7,650		(7,650)
Net income	85,100	30,000	33,750	5,700	87,050
Retained earnings January 1	250,400	150,000	150,000
			15,000
			9,750
			3,150		222,500
Net income	85,100	30,000	33,750	5,700	87,050
Less dividends declared	(30,000)	(10,000)		7,500
				2,500	(30,000)
Retained earnings December	305,500	170,000	211,650	15,700	279,550
Cash	53,100	47,000			100,100
Accounts receivable	176,000	65,000			241,000
Interest and other receivables	45,000	10,000		2,000	53,000
Inventory	140,000	50,000			190,000
Land	50,000	22,000		13,000	59,000
Buildings and equipment	400,000	240,000	60,000		700,000
Investments:
S company stocks	165,000			15,000
				150,000
S company bonds	42,400			42,400
T company bonds	134,000				134,000
Bond discount		3,000		1,200	1,800
	1,205,500	437,000			1,478,900
Depreciation accumulated	185,000	94,000		73,500	352,500
Accounts payable	65,000	11,000			76,000
Interest and other payables	45,000	12,000	2,000		55,000
Bonds payable	300,000	100,000	40,000		360,000
Common stock
P Corporation	150,000				150,000
S company		30,000	30,000
Additional paid-in capital	155,000	20,000	20,000		155,000
Retained earnings	305,500	170,000	211,650	15,700	279,550
Non-controlling interest			3,250	5,150
			1,050	50,000	50,850
	1,205,500	437,000	367,950	367,950	1,478,900