Pr 8.

6
For the fiscal year ended in April 30, 2006, Scala Company, the 90% owned
subsidiary
Pauda Corporation, had a net income of $120,000. During the year ended April 30,
2006,
the following intercompany transaction and events occurred:

A. Padua sold merchanidse to Scala for $180,000, at markup of 20% on Padua's cost.

Merchandise acquired from Padaua in Scala's inventories totaled $54,000 on May 1,

2005, and $84,000 on April 30, 2006, at billed prices.

DR CR
Intercompany Sales - Padua $180,000
Retained Earnings - Padua
($54,000 *.166666667) $9,000
(180,000*25)=$45,000*.20=$9,000)
Intercompany CGS-Padua ($180,000 *0.83333333)
$150,000
(180,000 + 54,000 - 84,000 = $150,000)
Cost of Goods Sold-Scala
($150,000 x166666667) $25,000
Inventories - Scala ($84,000 *.166666667)
$14,000

Selling Price Cost Gross Profit (25% of cost; 20% of selling

price)
Beginning Inventories $54,000 $43,200 $10,800
Add: Sales $180,000 $144,000 $36,000
Subtotals $234,000 $187,200 $46,800
Less: Ending inventories $84,000 $67,200 $16,800
Cost of goods sold $150,000 $120,000 $30,000

B. On May 1, 2005, Scala sold to Padua for $80,000 a machine with a carrying
amount to
Scala of $56,000. Padua established a remaining economic life of eight years, no
residual
value, and the straight-line method of depreciation for the machine.

PADUA CORPORATION AND SUBSIDIARY

Working Paper Elimination

Intercompany Gain on Sale of Machinery-Scala

($80,000 - $56,000) $24,000
Accumulated Depreciation- Padua ($24,000 / 8 yrs) $3,000

Machinery - Padua $24,000

Depreciation Expense - Padua $3,000

C. On April 30, 2006 Padua acquired in the open market $200,000 face amount of
Scala's 10%,
ten year bonds for $158,658, a yield rate of 14%. Scala had issued $400,000 face
amount of the
bonds on October 31, 2005, for $354,120, a yield rate of 12%. The bonds paid
interest each on
April 30 and October 31; Padua acquired its bond investment after the interest for
April 30,
2006, had been paid to the previous bondholders. Both Scala and Padua use the
interest
method of amortization or accumulation of bond discount.

Scala: T-Accounts

Bond Payable Cash

$200,000 $400,000 10/31/2005 10/31/2005 $354,120 $-
$(200,000)

Discount Bond Payable Interest Payable Interest Expense

$45,880 $1,247 (21,247-20,000) $10,000 $20,000 (354,120 x.12 x
.5) $21,247 $-
$44,633 $(10,000)
$22,317 (44,633*.5)

Gain on Extinguish Bonds

$- $19,025 4/30/2006 $- $- $- $-

Padua: T-Accounts

Investment in Scala Bond Interco Bond Payable

$158,658 $- 4/30/2006 $200,000 4/30/2006

Intercompany Interst Payable Discount on Intercompany Bond's Payable

$10,000 4/30/2006 $22,317 $- $- $-

Intercompany Interest Rec

$10,000 $- 4/30/2006 $- $- $- $-

Date Description DR CR
10/31/2005 Cash - Scala $354,120
Disc on Bonds Payable - Scala
($400,000 - $354,120) $45,880
Bonds Payable - Scala $400,000

4/30/2006 Interest Expense - Scala ($354,120 x .12 x .5) $21,247

Interest Payable - Scala ($400,000 x .10 x .5)

$20,000
Discount on Bonds Payable - Scala
($354,120 x .12 x. 5) - ($400,000 x .10 x .5)
$1,247
 Bonds Payable - Scala $200,000
Disc on Interco Bonds Payable - Scala $22,317
Interest Payable (20000 x .5) -Scala $10,000
Interco Bonds Payable - Padua $200,000
Disc on Intercompany Bond's Payable - Scala
$22,317
intercompany Interest Payable - Padua $10,000

10/31/2005 Intercompnay Bonds Payable - Scala $200,000

Disc on Interco Bonds Payable - Scala $22,317

Investment in Scala Co. Bonds - Padua $158,658

Gain on Extinguishment of Bonds - Scala

($200,000 - $22,317)-$158658 $19,025

Minority Interest in Net Income of Subsidiary $11,803

Minority interest in Net Assets of Subsidiary

$11,803
Net Income $120,000
Machinery $(24,000)
Depreciation Expense $3,000
Gain on Ext of Bonds-Scala $19,025
Adj of Net Income of Sub $118,025
Minority Interest Shares $11,803