Chapter 7 Test Bank

INTERCOMPANY PROFIT TRANSACTIONS BONDS

Multiple Choice Questions
LO1
1.

The intercompany purchase of the parent company bonds by a

subsidiary has the same effect on the consolidated financial
statements as the
a. purchase of the bonds by a non-affiliate.
b. parent's retirement of the bonds using funds from newly
issued common stock.
c. parent's retirement of the bonds using funds from a
subsidiary loan.
d. parent's retirement of the bonds using funds from the sale
of new bonds to non-affiliates.

LO1
2.

If an affiliate purchases bonds in the

intercompany bond liability book value is

open

market,

the

a. always assigned to the parent company because it has

control.
b. the par value of the bonds less the discount or plus the
premium and issuance costs at the time of issuance.
c. par value.
d. the par value of the bonds plus unamortized discount.
LO2
3.

Material constructive gains and losses from intercompany bond

holdings are
a. realized gains and losses from the issuing affiliates
perspective.
b. always assigned to the parent company because it has
control.
c. realized and recognized from the consolidated entitys
perspective.
d. excluded from the consolidated income statement until the
period in which they become realized.

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Use the following information in answering questions 4 and 5.

Australian Owl Company owns an 80% interest in Glider Company. On
January 1, 2006, Australian Owl had $600,000, 8% bonds outstanding
with an unamortized premium of $9,000. The bonds mature on December
31, 2010. Glider acquired one-third of Australian Owls bonds in the
open market for $198,000 on January 1, 2006. On December 31, 2006,
the books of the two affiliates held the following balances:
Australian Owls books
8% bonds payable
Premium on bonds
Interest expense

$600,000
7,200
46,200

Gliders books
Investment in Australian Owl bonds
Interest income

$198,400
16,400

LO2
4.

The gain from the bond purchase that appeared on the December
31, 2006 consolidated income statement was
a.
b.
c.
d.

LO2
5.

$
0.
$4,400.
$4,800.
$5,000.

Consolidated Interest Expense and consolidated Interest Income,

respectively,
that
appeared
on
the
consolidated
income
statement for the year ended December 31, 2006 was
a.
b.
c.
d.

$30,800
$30,800
$46,200
$46,200

and
and
and
and

$
0.
$16,400.
$
0.
$16,400.

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LO2
6.

Kingfisher Corporation owns 80% the voting stock of Tunnel

Corporation. On January 1, 2006, Kingfisher paid $391,000 cash
for $400,000 par of Tunnels 10% $1,000,000 par value
outstanding bonds, due on April 1, 2011. Tunnels bonds had a
book value of $1,045,000 on January 1, 2006. Straight-line
amortization is used. The gain or loss on the constructive
retirement of $400,000 of Tunnel bonds on January 1, 2006 was
reported in the 2006 consolidated income statement in the
amount of
a.
b.
c.
d.

$14,000.
$21,000.
$23,000.
$27,000.

Use the following information in answering questions 7, 8, and 9.

Rufous Owl Inc. had $800,000 par of 10% bonds payable outstanding on
January 1, 2006 due January 1, 2010 with an unamortized discount of
$16,000. Bird is a 90%-owned subsidiary of Rufous. On January 1,
2006, Bird Corporation purchased $160,000 par value of Rufouss
outstanding bonds for $152,000. The bonds have interest payment dates
of January 1 and July 1, and mature on January 1, 2009. Straight-line
amortization is used.
LO2
7.

With respect to the bond purchase, the consolidated income

statement of Rufous Owl Corporation and Subsidiary for 2006
showed a gain or loss of
a.
b.
c.
d.

LO2
8.

$ 4,000.
$ 4,800.
$ 8,000.
$10,200.

Bond Interest Receivable for 2006 of Owls bonds on Birds

books was
a.
b.
c.
d.

$ 7,600.
$ 8,000.
$15,200.
$16,000.

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LO2
9.

Bonds Payable appeared in the December 31, 2006 consolidated

balance sheet of Rufous Owl Corporation and Subsidiary in the
amount of
a.
b.
c.
d.

$624,000.
$628,000.
$630,400.
$637,800.

Use the following information for questions 10 through 15.

Dollarbird Corporation issued five thousand, $1,000 par, 12% bonds on
January 1, 2004. Interest is paid on January 1 and July 1 of each
year; the bonds mature on January 1, 2009. On January 1, 2006, Branch
Corporation, an 80%-owned subsidiary of Dollarbird, purchased 3,000
of the bonds on the open market at 101.50. Dollarbird's separate net
income for 2006 included the annual interest expense for all 3,000
bonds. Branchs separate net income was $300,000, which included the
bond interest received on July 1 as well as the accrual of bond
interest revenue earned on December 31.
LO2
10.
What was the amount of gain or (loss) from the intercompany
purchase of Dollarbirds bonds on January 1, 2006?
a.
b.
c.
d.
LO2
11.

$(60,000).
$(45,000).
$ 45,000.
$ 60,000.

If the bonds were originally issued at 106, and 80% of them

were purchased by Branch on January 1, 2007 at 98, the gain or
(loss) from the intercompany purchase was
a.
b.
c.
d.

$(224,000).
$(176,000).
$ 176,000.
$ 224,000.

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LO2
12.

LO2
13.

If the bonds were originally issued at 103, and 70% of them

were purchased on January 1, 2008 at 104, the constructive gain
or (loss) on the purchase was
a.
b.
c.
d.

Using the original information,

Interest Expense for 2006 was
a.
b.
c.
d.

LO2
14.

LO2
15.

$(119,000).
$(35,000).
$35,000.
$119,000.

$
$
$
$

the

amount

of

consolidated

120,000.
240,000.
300,000.
600,000.

Using the original information, the balances for the Bonds

Payable and Bond Interest Payable accounts, respectively, on
the consolidated balance sheet for December 31, 2007 were
a.
b.
c.
d.

$2,000,000
$2,000,000
$5,000,000
$5,000,000

and
and
and
and

$120,000.
$240,000.
$120,000.
$240,000.

The elimination entries on the consolidation working papers

prepared on December 31, 2006 included at least
a. debit to Bond Interest Expense for $360,000.
b. credit to Bond Interest Expense for $360,000 and a debit to
Bond Interest Payable for $180,000.
c. credit to Bond Interest Receivable for $360,000.
d. debit to Bond Interest Revenue for $360,000.

LO3
16.

No constructive gain or loss arises from the purchase of an

affiliates bonds if the
a. affiliate is a 100%-owned subsidiary.
b. bonds are purchased at book value.
c. bonds are purchased with arms-length bargaining
outside entities.
d. gain or loss cannot be reasonably estimated.

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from

LO3
17.

Constructive gains or losses are allocated between purchasing

and issuing affiliates according to
a.
b.
c.
d.

LO3
18.

the agency theory.

the par value theory.
either the agency theory or the par value theory.
neither the agency theory nor the par value theory.

No allocation of gain or loss on the constructive retirement of

intercompany bonds will occur
a.
b.
c.
d.

when the subsidiary is the issuing affiliate.

when the effective interest rate method is applied.
in the consolidated income statement.
when the parent company is the issuing affiliate.

Use the following information in answering questions 19 and 20.

Mistletoebird Corporation owns an 80% interest in Berries Company
acquired at book value several years ago. On January 1, 2006, Berries
purchased $100,000 par of Mistletoebirds outstanding bonds for
$103,000. The bonds were issued at par and mature on January 1, 2009.
Straight-line amortization is used. Separate incomes of Mistletoebird
and Berries for 2006 are $350,000 and $120,000, respectively.
LO4
19.

Consolidated net income for 2006 was

a.
b.
c.
d.

LO4
20.

$443,600.
$444,000.
$444,400.
$448,000.

Minority interest income for 2006 was

a.
b.
c.
d.

$23,000.
$23,600.
$24,000.
$24,400.

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LO1
Exercise 1
Separate company and consolidated income statements for Pitta and New
Guinea Corporations for the year ended December 31, 2006 are
summarized as follows:
Pitta
Sales Revenue
Income from New Guinea
Bond interest income
Gain on bond retirement
Total revenues

Cost of sales
Bond interest expense
Other expenses
Minority interest income
Total expenses
Net income

500,000
19,900

New
Guinea
100,000

Consolidated
$

6,000
519,900

280,000
9,000
120,900
409,900
110,000

3,000
603,000

106,000
$

50,000

31,000
81,000
25,000

600,000

330,000
3,600
151,900
7,500
493,000
110,000

The interest income and expense eliminations relate to a $100,000, 9%

bond issue that was issued at par value and matures on January 1,
2011. On January 1, 2006, a portion of the bonds was purchased and
constructively retired.
Required:

Answer the following questions.

1. Which company is the issuing affiliate?

2. What is the dollar effect of the constructive retirement on
consolidated net income for 2006?
3. What portion of the bonds remains outstanding at December 31,
2006?
4. Is New Guinea a wholly-owned subsidiary? If not, what percentage
does Pitta own?
5. Does the purchasing affiliate use straight-line or effective
interest amortization?
6. Explain
Guinea.

the

calculation

of

Pittas

$19,900

income

from

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New

LO1
Exercise 2
Jacky Winter Corporation owns a 90% interest in Park Company.
The
following information is from the adjusted trial balances at December
31, 2005, at which time the bonds have four years to maturity. Jacky
Winter acquired Parks bonds at the beginning of the year. The bonds
have interest payment dates of January 1 and July 1.

Investment in Park Bonds, $200,000 par

10% Bonds payable, $400,000
Bond premium
Interest expense
Interest receivable
Interest income
Interest payable

Jacky
Winter
196,000

Park
400,000
16,000
36,000

10,000
21,000
20,000

Required:
Prepare the necessary consolidation working paper entries on December
31, 2006 with respect to the intercompany bonds.

LO2
Exercise 3
Pheasant Corporation owns 80% of Rural Corporations outstanding
common stock that was purchased at book value and fair value on
January 1, 1999.
Additional information:
1. Pheasant sold inventory items that cost $3,000 to Rural during
2006 for $6,000. One-half of this merchandise was inventoried by
Rural at year-end. At December 31, 2006, Rural owed Pheasant
$2,000
on
account
from
the
inventory
sales.
No
other
intercompany sales of inventory have occurred since Pheasant
acquired its interest in Rural.
2. Pheasant sold a plant asset with a book value of $5,000 and a 5year useful life to Rural for $10,000 on December 31, 2004. This
plant asset remains in use by Rural and is depreciated by the
straight-line method.
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3. On January 2, 2006, Rural paid $10,800 for $10,000 par value of

Pheasants 10-year, 10% bonds. These bonds have interest payment
dates of January 1 and July 1, and mature on January 1, 2010.
Straight-line amortization has been applied by Rural to the
Pheasant bond investment.
4. Pheasant uses the equity method in accounting for its investment
in Rural.

Required:
Complete the working papers to consolidate the financial statements
of Pheasant Corporation and Rural for the year ended December 31,
2006.

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Pheasant Corporation and Subsidiary

Consolidation Working Papers
at December 31, 2006
Eliminations
Pheasant
Rural
Debit
Credit
INCOME STATEMENT
Sales
Income from
Gain or loss on
bonds
Interest Income
Cost of sales
Depreciation
Interest expense
Net income
Retained
Earnings 1/1
Add: Net income
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
Interest Rec
Receivables
Inventories
Equipment-net
Investment in
Rural stock
Investment in
Pheasant bonds
TOTAL ASSETS
LIAB. & EQUITY
Accounts payable
Interest payable
Bonds payable
Capital stock
Retained
Earnings
1/1 Noncontrl.
Interest
12/31 Noncontrl.
Interest
Expense
TOTAL LIAB. &
EQUITY

50,000
6,900

Balance
Sheet

$ 24,000

800
9,000)
5,800)

( 14,000) (
( 3,900) (
( 2,000)
37,000
10,000

12,000
8,000
37,000
10,000
( 6,000) ( 2,000)
$

43,000

$ 16,000

8,000

1,400
500
3,500
3,000
31,000

11,000
5,000
43,000
30,100
$

97,100

10,600
$ 50,000

3,100
1,000
20,000
30,000

6,000

28,000

43,000

16,000

97,100

$ 50,000

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LO2
Exercise 4
December 31, 2006 balance sheets for Wren Corporation, and Schrub
Corporation, its 90%-owned subsidiary, are presented in the first two
columns of partially completed balance sheet working papers. Wren
paid $160,000 for its 90% interest in Schrub on January 1, 2003 when
Schrub had $150,000 of total stockholders equity. The $25,000 costbook differential was assigned to plant assets with a 10-year
remaining life.
On January 1, 2006, Wren purchased $50,000 of Schrub Corporations
10% bonds for $48,000, at which time the unamortized premium on the
bonds was $2,000. The bonds pay interest on June 30 and December 31
and mature on December 31, 2010. Both Wren and Schrub use straightline amortization. Wren uses the equity method of accounting for its
investment in Schrub.
Required:
Complete the consolidated balance sheet working papers.

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Wren Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
at December 31, 2006
Eliminations
Wren
Schrub
Debit
Credit
BALANCE SHEET
Cash
$ 39,100
Receivables
80,000
Interest
Receivable
2,500
Inventories
70,000
Land
50,000
Plant assets-net
160,000
Investment in
Schrub bonds
48,400
Investment in
Schrub stock
179,160
TOTAL ASSETS
$ 629,160
LIAB. & EQUITY
Accounts payable
47,000
Bond interest
payable
10,000
10% Bonds
Payable
200,000
Premium on bonds
payable
Capital stock
280,000
Retained
Earnings
92,160
Minority
Interest
TOTAL LIAB. &
EQUITY
$ 629,160

NonCntl.

$ 30,000
75,000
40,000
45,000
120,000

$310,000
23,400
5,000
100,000
1,600
120,000
60,000

$310,000

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Consolidated

LO2
Exercise 5
Sunbird Corporation owns a 70% interest in Veranda Corporation. At
December 31, 2005, Veranda had $3,000,000 of par value 12% bonds
outstanding with an unamortized premium of $60,000. The bonds have
interest payment dates of January 1 and July 1 and mature on January
1, 2010.
On January 2, 2006,
Verandas outstanding
amortization.

Sunbird purchased $1,200,000 par value of

bonds for $1,209,600. Assume straight-line

Required:
Prepare the necessary consolidation working paper entries on December
31, 2006 with respect to the intercompany bonds.
LO2
Exercise 6
Rock is an 80%-owned subsidiary of Gibberbird. On January 1, 2005,
Rock issued $450,000 of $1,000 face amount 6% bonds at par. The bonds
have interest payments on January 1 and July 1 of each year and
mature on January 1, 2009. On July 1, 2006, Gibberbird purchased all
450 bonds on the open market for $1,030 per bond.
Required: With respect to the bonds, use General Journal format to:
1. Record the 2006 journal entries from July 1 to December 31 on
Rocks books.
2. Record the 2006 journal entries from July 1 to December 31 on
Gibberbirds books.
3. Record the elimination entries for the consolidation working
papers at December 31, 2006.

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LO2 & 3
Exercise 7
Caterpillar Inc. is an 80%-owned subsidiary of Bellbird Corp. On
January 1, 2005, Caterpillar issued $600,000 of $1,000 face amount 6%
bonds at $964 per bond. Interest is paid on January 1 and July 1 of
each year and covers the preceding six months. On July 1, 2006,
Bellbird purchased all 600 bonds on the open market for $1,030 per
bond. The following table shows selected amounts of amortization on
the bonds:
Amortization Table for the Bond Discount
Date
01-01-05
12-31-05
07-01-06
12-31-06
12-31-07

Remaining Balance
$21,600
14,400
10,800
7,200
0

Required: With respect to the bonds, use General Journal format to:
1. Record the 2006 journal entries from July 1 to December 31 on
Caterpillars books.
2. Record the 2006 journal entries from July 1 to December 31 on
Bellbirds books.
3. Record the elimination entries for the consolidation working
papers at December 31, 2006.

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LO2&3
Exercise 8
Thornbill Corporation owns 90% of the outstanding voting common stock
of Hangout Corporation. On January 1, 1998, Hangout issued $1,000,000
face amount of 12%, $1,000 bonds payable at 119.20. The bonds pay
interest on January 1 and July 1 of each year and mature on for on
January 1, 2009. On July 1, 2006, Thornbill purchased all of the
outstanding bonds at a price of 107.50.
Required:
1. Explain the relationship between the balances in the Investment
in Hangout Bonds account on Thornbills books and the bondrelated accounts, i.e., Bonds Payable and Discount/Premium on
Bonds Payable, on Hangouts books.
2. Using your written rationale from Requirement 1, determine the
balance in the Investment in Hangout Bonds account on December
31, 2006, October 31, 2007, May 31, 2008 and November 30, 2008,
assuming that amortization is recorded monthly.
LO3&4
Exercise 9
Honeyeater Corporation owns a 60% interest in Waterhole Corporation
acquired several years ago at a price equal to book value and fair
value. On December 31, 2005, Waterhole had $900,000 par of 12% bonds
outstanding with an unamortized premium of $30,000. The bonds mature
in five years and pay interest on January 1 and July 1. On January 1,
2006, Honeyeater acquired one-third of Waterholes bonds for
$317,000. Honeyeater and Waterhole use straight-line amortization.
Waterhole reports net income of $300,000 for 2006.
Required:
1. Calculate Honeyeaters income from Waterhole for 2006.
2. Calculate the minority interest income for 2006.

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LO4
Exercise 10
Willy Wagtail Company has $4,000,000 of 12% bonds outstanding on
December 31, 2004 with unamortized premium of $120,000. These bonds
pay interest semiannually on January 1 and July 1 and mature on
January 1, 2010. Straight-line amortization is used.
Garden Inc., 80%-owned subsidiary of Willy Wagtail, buys $1,000,000
par value of Willy Wagtails outstanding bonds in the market for
$980,000.
There is only one issue of outstanding bonds of the
affiliated companies and they have consolidated financial statements.
For the year 2005, Willy Wagtail has income from its separate
operations (excluding investment income) of $4,500,000 and Garden
reports net income of $600,000.
Required: Determine the following:
1. Noncontrolling interest expense for 2005.
2. Consolidated net income for Willy Wagtail Company and subsidiary
for 2005.

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SOLUTIONS
Multiple Choice Questions
1

Book value of Australian Owls

bonds acquired by Glider equals
1/3 times ($600,000 + $9,000)
Less: Cost of acquiring
Australian Owl bonds
Constructive gain on Australian
Owl bonds
Consolidated interest expense =
$46,200 x 2/3

Australian Owls separate

income:
Income from Glider ($120,000 x
80%) =
Less: Loss on constructive
retirement of Australian Owls
bonds
Plus: Piecemeal recognition of
the constructive loss ($3,000/3
years) =
Consolidated net income
Because Australian Owl is the
issuing entity the gain or loss
is
not
allocated
to
the
noncontrolling
interest.
The
noncontrolling interest expense
is ($120,000 x 20%) or

203,000

198,000
5,000

30,800

350,000
96,000

3,000 )

1,000
444,000

24,000

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10

11

12

Full interest for 12 months

Equals $920,000 x 10%
Less: interest on $230,000 for 9
months = $230,000 x 10% x 75%
Consolidated interest expense

Book value of Polecats bonds

x % purchased by Seadog
Equals: Book value purchased
Purchase price ($970 x 1,600)=
Gain on retirement
Total book value acquired =
$5,000,000 x 60%
Purchase price 3,000 bonds x
$1,015
Loss on constructive retirement
Book value at January 1, 2007
equals $5,300,000 minus
$180,000=
Percentage of bonds acquired
Equals book value acquired
Purchase price 4,000 bonds x
$980=
Gain on constructive retirement=

92,000

17,250
74,750

4,024,000

$
$

40%
1,609,600
1,552,000
57,600

3,000,000
3,045,000

45,000

5,120,000
80%
4,096,000
3,920,000

176,000

Book value at January 1, 2008

equals $5,150,000 minus $120,000
Percentage of bonds acquired
Equals book value acquired
Purchase price 3,500 bonds x
$1,040
Loss on constructive retirement

5,030,000

119,000

240,000

2,000,000

13

($5,000,000 - $3,000,000) x 12%

=

14

Bonds payable $5,000,000 minus

bonds held by Branch of
$3,000,000

70%
3,521,000
3,640,000

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Interest accrued on December 31,

2007 will be the interest on
bonds held by non-affiliates or
$2,000,000 x 12% x year =
15

16

17

18

19

20

Mistletoebirds separate income:

Income from Berries ($120,000 x
80%) =
Less: Loss on constructive
retirement of Mistletoebird
bonds
Plus: Piecemeal recognition of
the constructive loss ($3,000/3
years) =
Consolidated net income
Since Mistletoebird is the
issuing entity the gain or loss
is not allocated to the
noncontrolling interest. The
noncontrolling interest income
is ($120,000 x 20%).

120,000

350,000
96,000

3,000 )

1,000
444,000

24,000

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Exercise 1
1. Pitta is the issuing affiliate.
2. Effect on consolidated net income:
Gain on constructive retirement of bonds
$
Less: Piecemeal recognition of gain ($6,000
interest income - $5,400 interest expense)
(
Increase in consolidated net income
$

3,000
600 )
2,400

3. Percent of bonds outstanding on December 31, 2006 is 40%,

computed as $3,600 consolidated interest expense divided by
$9,000 interest expense of Pitta.
4. New Guinea is partially owned as evidenced by the minority
interest income. The ownership percentage is 70% ($7,500
minority interest income divided by $25,000 income of New
Guinea = 30% minority interest.
5. Straight-line amortization
$100,000 par x 60% purchased
Purchase price 5 years before maturity
Gain

Nominal interest ($60,000 x 9%)

Discount amortization ($3,000/5 years)
Bond interest income

$
$

60,000
57,000
3,000

5,400
600
6,000

6. Pittas income from New Guinea

Share of New Guineas reported income
($25,000 x 70%) =
$
Add: Constructive gain
Less: Piecemeal recognition of constructive
gain
(
Income from New Guinea
$

17,500
3,000
600 )
19,900

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Exercise 2
2006
12/31
12/31

Debit
10,000

Bond Interest Payable

Bond Interest Receivable

Credit
10,000

Bonds Payable
Interest Revenue
Bond premium
Interest Expense (50% owned)
Investment in Parks Bonds
Gain on bonds

200,000
21,000
8,000

Supporting Computations:
Cost of bonds to Jacky Winter
196,000-1,000 amortization
Book value acquired 1/1/2005 where
4,000 per year is amortized
($400,000 + $20,000) x 50% =
Gain on constructive bond retirement

18,000
196,000
15,000
$

195,000
210,000

15,000

Exercise 3
Pheasant Corporation and Subsidiary
Consolidation Working Papers
at December 31, 2006
Eliminations
Pheasant
Rural
Debit
Credit
INCOME STATEMENT
Sales
$
Income from
Loss on bonds
Interest Income
Cost of sales
(
Depreciation
(
Interest expense
(
Minority income
Net income
Retained
Earnings 1/1
Add: Net income
Dividends
(
Retained
Earnings 12/31
$

50,000
6,900

a
e
d
800 d
9,000) b
5,800)

14,000) (
3,900) (
2,000)

$24,000

37,000

(
$ 6,000
1,000
1,000
$2,000

8,000
e

Consolidated
$68,000

10,000

12,000
8,000 f
37,000
10,000
6,000) ( 2,000)
43,000

$ 6,000
6,900
800
800
1,500 a
c
d

Noncontl.

1,600(

$16,000

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800)

( 18,500)
( 8,700)
( 1,000)
( 2,000)
37,000

12,000
37,000
400) ( 6,000)
$43,000

BALANCE SHEET
Cash
Interest Rec
Receivables
Inventories
Equipment-net
Investment in
Rural stock
Investment in
Pheasant bonds
TOTAL ASSETS
$
LIAB. & EQUITY
Accounts payable
Interest payable
Bonds payable
Capital stock
Retained
Earnings
1/1 Noncontl.
Interest
12/31 Noncontl.
Interest Expense
TOTAL LIAB. &
$
EQUITY

8,000
11,000
5,000
43,000

1,400
500
3,500
3,000
31,000

$ 9,400

c
30,100
97,100

h
g
b
c
4,000 e
f

500
2,000
1,500
3,000
5,300
28,800

10,600

10,600
$50,000

3,100
1,000
20,000
30,000

6,000

28,000

43,000

16,000

12,500
6,500
71,000

$99,400
g
h
d
f

2,000
500
10,000
28,000

7,100
500
10,000
30,000
43,000
f

7,200 7,200
8,800

97,100

$50,000

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8,800
$99,400

Exercise 4
Wren Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2006
Eliminations
Wren
Schrub
Debit
Credit
BALANCE SHEET
Cash
$ 39,100
Receivables
80,000
Interest
Receivable
2,500
Inventories
70,000
Land
50,000
Plant assets-net
160,000
Investment in
Schrub bonds
48,400
Investment in
Schrub stock
179,160
TOTAL ASSETS
$ 629,160
LIAB. & EQUITY
Accounts payable
47,000
Bond interest
payable
10,000
10% Bonds
Payable
200,000
Premium on bonds
payable
Capital stock
280,000
Retained
Earnings
92,160
Noncontroling
Interest
TOTAL LIAB. &
$
EQUITIES
629,160

Noncntl

$30,000
75,000

$69,100
155,000
c

40,000
45,000
120,000

Consolidated

2,500
110,000
95,000
295,000

$ 15,000
a
a
b

48,400
2,160
177,000

$310,000

$724,100

23,400

70,400

5,000

2,500

12,500

100,000

50,000

250,000

1,600
120,000

a
b

800
120,000

800
280,000

60,000

60,000

92,160
a
b

$310,000

248,300

240
18,000
248,300

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18,240
$724,100

Supporting computations
Book value of bonds
($102,000 x 50%)
Cost of acquiring $50,000 par
Constructive gain
Piecemeal recognition of gain
Unrecognized at December 31,
2006
Majority share ($2,400 x 90%)
Minority share ($2,400 x 10%)

51,000
48,000 )
3,000
600 )

(
(

$
$

Excess allocated to plant

assets
Depreciation for 4 years
($2,500 x 4 years)
Remaining excess

2,400

25,000

10,000 )
15,000

2,160
240

Exercise 5
2006
12/31
12/31

Bond Interest Payable

Bond Interest Receivable
Premium on Bonds Payable
Bonds Payable
Interest Revenue
Interest Expense
Investment in Veranda Bonds
Gain on Retirement of Bonds
Supporting Computations:
Cost of bonds to Sunbird
Book value acquired
($3,000,000 + $60,000) x 40% =
Gain on constructive bond retirement

Debit
72,000

Credit
72,000

18,000
1,200,000
141,600
138,000
1,207,200
14,400
$

1,209,600

1,224,000
14,400

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4 years remaining
Premium on Bond Payable
$60,000 x 3/4 x 40% = $18,000
Interest Expense
$1,200,000 x 12%
= $144,000
Less: $60,000 x 1/4 x 40% = $ 6,000
$138,000
Interest Revenue
$144,000 - ($9,600 x 1/4) = $141,600

Exercise 6
Date
2006

Account Name

Gibberbirds books
Jul 01 Investment in Rock Bonds
Cash
Dec 31 Bond Interest Receivable
Bond Interest Revenue
Investment in Rock Bonds

Debit
463,500

463,500

13,500
10,800
2,700

Rocks books
Dec 31 Bond Interest Expense
Bond Interest Payable

13,500

Consolidated Working Papers

Dec 31 Bond Interest Payable
Bond Interest Receivable

13,500

Dec 31 Bonds Payable

Loss on Bonds
Bond Interest Revenue
Bond Interest Expense
Investment in Rock Bonds

Credit

450,000
13,500
10,800

13,500

13,500

13,500
460,800

Interest Revenue:
($450,000 x 6% x 1/2) - ($13,500 premium/5 periods) =
$13,500 - $2,700 = $10,800

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Exercise 7
Date
2006

Account Name

Bellbirds books
Jul 01 Investment in Caterpillar Bonds
Cash
Dec 31 Bond Interest Receivable
Bond Interest Revenue
Investment in Caterpillar Bonds
Caterpillars books
Dec 31 Bond Interest Expense
Bond Interest Payable
Discount on Bonds Payable
Consolidated Working Papers
Dec 31 Bond Interest Payable
Bond Interest Receivable
Dec 31 Bonds Payable
Loss on Bonds
Bond Interest Revenue
Bond Interest Expense
Discount on Bonds Payable
Investment in Caterpilllar Bonds

Debit
618,000

Credit

618,000

18,000
14,400
3,600
21,600

18,000
3,600

18,000
18,000
600,000
28,800
14,400

20,600
7,200
614,400

(Book value of bonds $589,200 - purchase cost $618,000 = $28,800 loss)

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Exercise 8
Requirement 1
The purpose of the Investment in Hangout Bonds account on the
acquirers
books
and
the
Bonds
Payable,
Discount
on
Bonds
Payable/Premium on Bonds Payable accounts on the issuers books is
similar in that each set of accounts is tracking the net book value
of the bonds. Since we know that at the maturity date the net book
value of the books must be equal to the face amount of the bonds
being redeemed, then no matter what amounts are initially placed into
these accounts, the balance on the maturity date is equal to the
maturity value of the bonds. Therefore, both sets of accounts are
moving toward the same final number. In this problem, the original
premium on the bonds is a total of $192,000 which is $192 per bond.
Since the bonds have an eight-year or 96-month term, the rate of
amortization is $2 per month per bond or $2,000 per month in total.
When Thornbill acquires the bonds it pays a premium of $75,000 which,
when amortized over the 30-month remaining life of the bond will
produce an amortization rate of $2.50 per month per bond or $2,500
per month in total. When these different rates of amortization are
applied to the Premium on Bonds Payable on Hangouts books and the
Investment in Hangout Bonds account on Thornbills books, the account
balances converge toward the face amount of the bonds.
Requirement 2
Amortization date
Dec
Oct
May
Nov

31,
31,
31,
30,

2006
2007
2008
2008

Months since acquisition

6
16
23
29

months
months
months
months

Cumulative amortization
$15,000
$40,000
$57,500
$72,500

The $75,000 premium on the bonds as acquired by Thornbill will be

amortized at a rate of $2,500 per month ($75,000 premium/30
months to maturity). The balance in the Investment in Hangout
Bonds account will be the original balance of $1,075,000 minus
the cumulative amortization amounts shown above or:
Dec
Oct
May
Nov

31,
31,
31,
30,

2006
2007
2008
2008

$1,060,000
$1,035,000
$1,017,500
$1,002,500

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Exercise 9
Preliminary computations:
Book value of bonds $930,000 x 1/3 =
Cost of bonds
Loss on constructive retirement

Requirement 1:
Income from Waterhole:
Share of Waterholes income ($300,000 x
60%)
Less: Constructive loss ($7,000 x 60%)
Plus: Piecemeal recognition of loss
($7,000/5 years) x 60%
Income from Waterhole
Requirement 2:
Minority interest income:
Waterholes reported income
Less: Constructive loss on bonds
Plus: Piecemeal recognition of loss
Equals: Adjusted reported income
Minority percentage
Minority interest income

310,000
317,000
7,000

$
(
$

$
(
$
$

180,000
4,200 )
840
176,640

300,000
7,000 )
1,400
294,400
40%
117,760

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Exercise 10
Requirement 1
Minority interest income $600,000 x 20%
Requirement 2
Consolidated net income:
Income from Willy Wagtails operations
Income from Garden:
Willy Wagtails share of Garden income
= 80% x $600,000
Add: Constructive gain on bond
retirement ($4,000,000 + $120,000)*25%980,000
Less: Piecemeal recognition of gain =
$50,000/8 years
(

120,000

4,500,000

$ 480,000
50,000
12,500 )
517,500

Less: Noncontrolling interest expense

20% x $600,000 =
Consolidated net income

(
$

120,000 )
4,897,500

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