Chapter 7 INTERCOMPANY PROFIT TRANSACTIONS BONDS

Answers to Questions 1 2 Intercompany borrowing gi e! ri!e to note! or a" ance! recei ab#e $rom an" payab#e to a$$i#iate!% a! we## a! reciproca# intere!t recei ab#e an" payab#e acco&nt! an" intere!t income an" e'pen!e acco&nt!( Direct #en"ing an" borrowing tran!action! "o not gi e ri!e to &nrea#i)e" gain! an" #o!!e!( Any income reporte" by t*e #en"er i! preci!e#y reciproca# to an e'pen!e reporte" by t*e borrower% an" t*e tran!action! are comp#ete on t*e "ate con!&mmate"( Simi#ar#y% "irect #en"ing an" borrowing tran!action! "o not gi e ri!e to &nrecogni)e" gain! an" #o!!e! !ince intercompany amo&nt! recei e" an" pai" are bot* rea#i)e" an" recogni)e" $rom t*e iewpoint o$ t*e !eparate #ega# entitie!( Con!tr&cti e gain! an" #o!!e! are gain! an" #o!!e! $rom t*e iewpoint o$ t*e con!o#i"ate" entity b&t not $rom t*e iewpoint o$ t*e !eparate a$$i#iate! in o# e"( T*e p&rc*a!e o$ a parent+! o&t!tan"ing bon"! by it! !&b!i"iary at a price be#ow t*e boo, a#&e o$ t*e bon"! on t*e parent+! boo,! re!&#t! in a con!tr&cti e gain( A#t*o&g* t*e bon"! are not act&a##y retire"% t*ey are con!tr&cti e#y retire" $rom t*e iewpoint o$ t*e con!o#i"ate" entity beca&!e t*ey are no #onger #iabi#itie! o$ t*e con!o#i"ate" entity to o&t!i"e partie!( T*e boo, a#&e o$ t*e #iabi#ity i! -.%//0%1//% comp&te" a! -.%///%/// p#&! -./%/// min&! -2%3//( I$ an a$$i#iate p&rc*a!e! *a#$ o$ t*e bon"! at 45% it wi## recor" a bon" in e!tment o$ -04/%///( From t*e iewpoint o$ t*e con!o#i"ate" entity% t*e p&rc*a!e o$ t*e bon"! re!&#t! in a con!tr&cti e retirement o$ -2//%/// par o$ bon"! payab#e( T*e con!tr&cti e gain on t*e bon"! i! -.6%32/ 78-.%//0%1// 2/9: ; -04/%///<( A con!tr&cti e gain on bon"! i! a gain $or con!o#i"ate" !tatement p&rpo!e! t*at i! not recor"e" on t*e boo,! o$ t*e !eparate a$$i#iate!( T*e a$$i#iate! contin&e to carry t*e bon"! a! a #iabi#ity 8i!!&er: an" in e!tment 8p&rc*a!er: on t*eir !eparate boo,!( A#ternati e#y% an &nrea#i)e" gain on t*e !a#e o$ #an" i! recor"e" on t*e boo,! o$ t*e !e##ing a$$i#iate% b&t it i! not recogni)e" a! a gain $or con!o#i"ate" !tatement p&rpo!e! beca&!e t*e #an" i! !ti## *e#" wit*in t*e con!o#i"ate" entity( T*&!% a con!tr&cti e gain on bon"! i! rea#i)e" an" recogni)e" $rom t*e iewpoint o$ t*e con!o#i"ate" entity b&t it i! not recogni)e" on t*e boo,! o$ t*e a$$i#iate!( An &nrea#i)e" gain on t*e !a#e o$ #an" i! recogni)e" on t*e boo,! o$ t*e !e##ing a$$i#iate b&t i! not rea#i)e" or recogni)e" $rom t*e iewpoint o$ t*e con!o#i"ate" entity( Con!tr&cti e gain! on intercompany bon"! are rea#i)e" an" recogni)e" t*ro&g* t*e intere!t income an" e'pen!e reporte" on t*e !eparate boo,! o$ t*e a$$i#iate!( T*e "i$$erence between t*e intere!t income reporte" by t*e in e!tor an" t*e intere!t e'pen!e reporte" by t*e i!!&er on t*e intercompany bon"! i! t*e amo&nt o$ con!tr&cti e gain recogni)e" in eac* perio"( Con!tr&cti e gain! an" #o!!e! are recogni)e" in t*e con!o#i"ate" $inancia# !tatement! be$ore t*ey are recogni)e" on t*e boo,! o$ t*e a$$i#iate!( I$ a !&b!i"iary p&rc*a!e! parent bon"! at a price in e'ce!! o$ boo, a#&e% a con!tr&cti e #o!! re!&#t!( T*e #o!! i! attrib&te" to t*e parent !ince it i! t*e parent bon"! t*at are con!tr&cti e#y retire"( T*i! approac* o$ a!!ociating con!tr&cti e gain! an" #o!!e! on intercompany bon"! wit* t*e i!!&er i! con!i!tent wit* t*e proce"&re! &!e" in ear#ier c*apter! o$ a!!ociating gain! an" #o!!e! on intercompany !a#e! tran!action! wit* t*e !e##ing a$$i#iate!(

=6/.. Pear!on E"&cation% Inc( p&b#i!*ing a! Prentice >a## 1?.

7-2

Intercompany Profit Transactions Bonds

8a

Assume bonds were purchased at the beginning of the current year 10% bonds payable 52,000 Interest income 5,250 Interest payable 2,500 Investment in S bonds 49,000 Interest expense 4,500 Interest receivable 2,500 Constructive gain on bonds ,!50 "o eliminate reciprocal bond investment and liability amounts, reciprocal interest income and expense amounts, reciprocal interest receivable and payable amounts, and enter t#e constructive gain on bonds$ "#e constructive gain is computed as t#e %52,500 boo& value o' bonds t#at (ere retired 'or %4),!50$

8b

Assume bonds were purchased one year earlier 10% bonds payable 52,000 Interest income 5,250 Interest payable 2,500 Investment in S bonds 49,000 Interest expense 4,500 Interest receivable 2,500 Investment in S stoc& *90%+ , !5 ,oncontrolling interest !5 "o eliminate reciprocal bond investment and liability amounts, reciprocal interest income and expense amounts, reciprocal interest receivable and payable amounts, and ad-ust controlling and noncontrolling interest #oldings 'or constructive gain less piecemeal recognition$ "#e constructive gain is computed as. %5 ,000 boo& value / %4),500 cost 0 %4,500 o' (#ic# %!50 (as recogni1ed on t#e boo&s o' t#e a''iliates in t#e prior year$

Separate entries are as follows: Investment in S Income 'rom S "o recogni1e income subsidiary income$ Investment in S Income 'rom S "o recogni1e gain on constructive retirement o' bonds *parent3s boo&s+$ "#e 'ull amount o' constructive gain on bonds is recogni1ed as investment income because (e assign t#e 'ull amount to t#e parent issuer$ e2ual to )0% o' reported 4,000 4,000 40,000 40,000

10

Investment income from subsidiary !5% o' subsidiary3s %100,000 reported income 4ess. !5% o' %),000 constructive loss on retirement o' subsidiary bonds Investment income 62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

%!5,000 5,000 %59,000

Chapter 7

7-3

11a 11b 11c

: constructive gain (ill result (#en interest income exceeds interest expense on t#e bonds t#at are constructively retired$ "#e constructive gain is associated (it# t#e parent since t#e issuer reports interest expense$ "#e %200 di''erence bet(een interest income and expense represents a piecemeal recognition o' t#e constructive gain 'rom t#e constructive retirement o' bonds payable$

SOLUTIONS TO EXERCISES Solution E7-1 1 c 2 a 3 4 d a

Solution E7-2 1 a ;oo& value o' 7an bond3s ac2uired by So( *%900,000 < %4),000+ 2= Cost to So( Constructive gain 2 d ,ominal interest on 7an3s remaining outstanding bonds % 00,000 )% 4ess. :morti1ation o' premium *%4),000 1= += 4 years Interest expense on consolidated income statement Solution E7-3 1 c Cost o' %)0,000 par o' 7al bonds >anuary 1, 2011 ;oo& value ac2uired *%400,000 par / %),000 discount+ 20% Constructive gain 2 d 7ar value o' bonds payable 4ess. ?namorti1ed discount *%),000 / %2,000+ ;oo& value o' bonds 7ercent outstanding ;onds payable 3 c Constructive gain %2,400=4 years years 4 c ,ominal interest :dd. :morti1ation o' discount 7ercent outstanding Interest expense 5 b 7iecemeal recognition o' gain is %2,400 25% in 2012$

%5 2,000 502,000 % 0,000 % 24,000 4,000 % 20,000

% !5,000 !),400 % 2,400 %400,000 *5,000+ 94,000 )0% % 15,200 % 1,)00

% 40,000 2,000 42,000 )0% % ,500

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7-4

Intercompany Profit Transactions Bonds

Solution E7-4 1 Controlling Interest S#are o' Consolidated net income (in thousands) 7at3s separate income :dd. Income 'rom Sal S#are o' Sal3s income *%500 )0%+ 4ess. 4oss on bonds constructively retired ;oo& value *%1,000 / %40+ 40% Cost to Sal :dd. 7iecemeal recognition o' loss *%15,000=4 years+ Controlling Interest S#are o' Consolidated net income 2 ,oncontrolling interest s#are Sal3s reported income %500 20% Consolidated ,et Income 0 %1,1)) < %100 0 %1,2))$ Solution E7-5 Pim Cor oration an! Sub"i!iar# Consolidated Income Statement 'or t#e year ended @ecember 1, 2019 *in t#ousands+ Sales 4ess. Cost o' sales Aross pro'it :dd. Aain on constructive retirement o' bondsb 4ess. Bperating expenses Bperating pro'it Bt#er Items. ;ond interest expensea Consolidated net income
a b

% %400

)00

% )4 400

*15+ 4 )) %1,1))

100

%1,500 *)!0+ 5 0 5 *250+ )5 % * 0+ 55

7arent3s bond interest expense %50,000 less interest on bonds #eld intercompany %20,000 0 % 0,000$ ;oo& value o' parent3s bonds purc#ased %200,000 less purc#ase price %194,000 0 %5,000 gain on constructive retirement$

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

Chapter 7

7-5

Solution E7-$ 1 Constructive loss Cost paid to retire 1=2 o' Son3s bonds ;oo& value o' bonds retired *%990,000 $5+ Constructive loss on bond retirement 2 Income from Son S#are o' Son3s reported income %14,000 !0% 4ess. Constructive loss %),000 !0% :dd. 7iecemeal recognition o' constructive loss *%),000=4 years+ !0% Income 'rom Son Solution E7-7 1 a >anuary 1, 2011 cost o' %200,000 par bonds ;oo& value ac2uired *%1,000,000 < %45,000 premium+ 20% Constructive gain b Constructive gain %1 ,500=5 years 4 years c ;oo& value %1,0 5,000 )0% outstanding %195,500 209,000 % 1 ,500 % 10,)00 %)2),)00 % 9,)00 *5,500+ 1,400 5,500 %50 ,000 495,000 % ),000

2 3

Solution E7-% 1a Constructive gain ;oo& value o' bonds >anuary 1, 2012 :morti1ation 'or 5 mont#s *% 0,000=4 years 1=2 year+ ;oo& value o' bonds >uly 1, 2012 7ercent purc#ased by Say ;oo& value o' bonds purc#ased 7urc#ase price Constructive gain 1b Consolidated bond interest expense for 2012 ;ond interest expense >anuary 1 to >uly 1 *%1,000,000 )% 1=2 year+ < % ,!50 amorti1ation ;ond interest expense >uly 1 to @ecember 1 C*%1,000,000 )% 1=2 year+ < % ,!50 amorti1ationD 40% Consolidated bond interest expense % 4 ,!50 1!,500 % 51,250 %9!0,000 ,!50 9! ,!50 50% %5)4,250 5!4,)00 % 9,450

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

7-6

Intercompany Profit Transactions Bonds

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

Chapter 7

7-7

1c

ond liabilit! of "ar >anuary 1, 2012 :morti1ation 2012 @ecember 1, 2012 7ar %1,000,000 %1,000,000 @iscount % 0,000 / !,500 %22,500 ;oo& Ealue %9!0,000 < !,500 %9!!,500 % 91,000

Consolidated bond liability %9!!,500 40% outstanding :lternative Calculation. ;oo& value at >uly 1, 2012 7ortion le't Femaining boo& value at >uly 1, 2012 :dd. @iscount amorti1ation*40% x % ,!50+ ;oo& value at @ecember 1, 2012 2 %9! ,!50 x 40% % )9,500 1,500 % 91,000

"#e amounts (ould not be di''erent i' Say #ad been t#e issuer and 7ar t#e purc#aser$ 9o(ever, t#e constructive retirement gains (ould Gbelong3 to Say and (ould #ave been allocated to bot# 7ar and t#e noncontrolling interests in Say$

Solution E7-& *amounts in t#ousands+ Subsidiar! purchases parent compan! bonds: 1a Aain on constructive retirement o' bonds ;oo& value o' 7in3s bonds constructively retired *%5,000 / %100 unamorti1ed discount+ 40% 7urc#ase price o' %1,000 par bonds Aain on constructive bond retirement 1b 1c 1! Consolidated interest payable *% ,000 < %1,000+ 10% interest 1=2 year ;onds payable at par *% ,000 < %1,000+ ,one ;ut Sid3s investment in 7in bonds (ill be %1,920$ Cost >anuary 2 :dd. :morti1ation *%100,000=5 years+ "otal *8liminated in consolidation+ 2a "arent purchases subsidiar! bonds: 4oss on constructive retirement o' bonds Sid3s bonds payable *%1,000 < %20+ 7rice paid by 7in 4oss on constructive retirement o' bonds *)0% to 7in and 20% to ,oncontrolling interests+ Consolidated interest expense 7in bonds *%5,000 10% interest+ < %20 amorti1ation %1,900 20 %1,920

%1,950 1,900 % 50 % 200

%4,000

%1,020 1,0 0 % *10+

2b

520

2c 2!

,one Interest receivable o' %50 is eliminated in consolidation$ ;oo& value o' bonds payable 62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

7-8

Intercompany Profit Transactions Bonds

7in3s bonds @ecember 1, 2011 :dd. :morti1ation 'or 2012 *%100 = 5 years+ ;oo& value o' bonds payable

%4,900 20 %4,920

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

Chapter 7

7-9

Solution E7-1' (in t)ou"an!"* 1 #ain from constructive retirement of bonds ;oo& value o' bonds purc#ased by Sal *%2,000 < %50+ 25% 7rice paid by Sal Aain 'rom constructive retirement o' bonds

%515 490 % 25

$or%ing paper entr! to eliminate effect of intercompan! bond holdings 12% bonds payable 512 52 Interest incomea Interest payable 0 Investment in 7ad bonds 492 Aain on retirement o' bonds 25 5! Interest expenseb Interest receivable 0
a b *%500 12% interest+ < %2 amorti1ation 0 %52 C*%2,000 12%+ / %12 amorti1ationD 25% intercompany 0 %5!

Consolidated income statement amounts 201& a Constructive gain b c ! ,oncontrolling interest s#are *% 00 20%+ ;ond interest expense C*%2,000 12%+ / %12D !5% outsiders ;ond interest income % %

,one 50 1!1 ,one ,one %1,52! ,one % 90

Consolidated balance sheet amounts 'ecember &1( 201& a Investment in 7ad bonds b c ! ;oo& value o' bonds payable *%2,000 < % 5+ !5% outsiders ;ond interest receivable ;ond interest payable %2,000 12% !5% outsiders 1=2 year

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

7-10

Intercompany Profit Transactions Bonds

Solution E7-11 "reliminar! computations: ;oo& value o' Sa( bonds on >anuary 1, 2012 7urc#ase price paid by 7ar Aain on constructive retirement o' Sa( bonds :morti1ation o' gain on bonds *%21!,000=! years+ Computation of noncontrolling interest share: S#are o' Sa(3s reported income *%140,000 20%+ :dd. S#are o' constructive gain *%21!,000 20%+ 4ess. 7iecemeal recognition o' constructive gain *% 1,000 20%+ ,oncontrolling interest s#are Par Cor oration an! Sub"i!iar# Consolidated Income Statement 'or t#e year ended @ecember 1, 2012 *in t#ousands+ Sales 4ess. Cost o' sales Aross pro'it :dd. Aain 'rom constructive retirement o' Sa( 4ess. Bperating expenses Consolidated net income 4ess. ,oncontrolling interest s#are Controlling interest s#are o' ,I Solution E7-12 1 "ub Corporation and Subsidiar!( 'ecember &1( 2011 :mounts :ppearing in Consolidated Hinancial Statements 0 0 2,000 !)5,500 0 !!,400 !,)00a %1,)00 950 )50 21! 400 55! 55$2 501$) %1,000,000 !) ,000 % 21!,000 % % 1,000 2),000 4 ,400 *5,200+ 55,200

% %

Interest receivable Investment in Sap bonds Interest payable *%40,000 )0%+ )% bonds payable **%1,000,000 )0%+/ 1 ,500 discount+ Interest income Interest expense *%)5,000=2+ < $)*)5,000=2+ 4oss on retirement o' bonds payable

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

Chapter 7

7-11

Solution E7-12 *continued+

a Computation of loss on intercompan! bonds ;alance o' investment in bonds at @ecember 1, 2011 %105,000 :dd. :mount amorti1ed 'or >uly 1 to @ecember 1, 2011 *%5,000 balance at @ecember 1 0= 5 mont#s 0 %5,000 unamorti1ed at >uly 1+ 1,000 Investment cost >uly 1, 2011 %105,000 4ess. ;oo& value ac2uired C%1,000,000 / *%15,000 9),200 unamorti1ed discount at @ecember 1 0= 5 mont#s+D 10% 4oss on constructive retirement o' bonds % !,)00

Consolidation wor%ing paper entries at 'ecember &1( 2011 Interest income ,000 )% bonds payable 9),500 4oss on retirement o' bonds !,)00 Investment in Sap bonds 105,000 Interest expense 4, 00 "o eliminate intercompany bonds, record constructive loss on retirement, and eliminate intercompany interest income and expense$ Interest payable 4,000 Interest receivable 4,000 "o eliminate reciprocal interest payable and receivable amounts$

Consolidation wor%ing paper entries at 'ecember &1( 2012 Investment in Sap *)0%+ 5,200 ,oncontrolling interest 1, 00 Interest income 5,000 )% bonds payable 99,100 Investment in Sap bonds 10 ,000 Interest expense ),500 "o eliminate intercompany bonds, interest income and expense, and to c#arge t#e unrecogni1ed portion o' t#e constructive loss at t#e beginning o' t#e period )0% to t#e investment in Sap and 20% to t#e noncontrolling interest$ Interest payable 4,000 Interest receivable 4,000 "o eliminate reciprocal interest payable and receivable amounts$

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

7-12

Intercompany Profit Transactions Bonds

Solution E7-13 1 #ain on constructive retirement of bonds 7urc#ase price o' bonds ;oo& value Aain on constructive retirement o' bonds 2 Son accounts for its investment in "ap bonds )anuar! 2( 201& Investment in 7ap bonds 4),)00 Cas# "o record investment in %50,000 par, )% 7ap bonds$ )ul! 1( 201& Cas# Investment in 7ap bonds Interest income "o record interest and amorti1ation$ 2,000 200 2,200 %4),)00 50,000 % 1,200

4),)00

'ecember &1( 201& Interest receivable 2,000 Investment in 7ap bonds 200 Interest income "o accrue interest and record amorti1ation$ 3 "ap accounts for its bonds pa!able )ul! 1( 201& Interest expense Cas# "o record interest payable 'or 5 mont#s$ 'ecember &1( 201& Interest expense Interest payable "o accrue interest 'or 5 mont#s$ 4 "ap accounts for its investment in Son 4,000

2,200

4,000

4,000 4,000

'ecember &1( 201& Investment in Son 40,)00 Income 'rom Son 40,)00 "o record income 'rom Son *)0% %50,000+ < %1,200 constructive gain / %400 piecemeal recognition o' gain$ 5 ,oncontrolling interest s#are *%50,000 20%+ % 10,000 %240,)00

Controlling s#are o' ,I *%200,000 < %40,)00+ Consolidated ,et Income 0 %10,000 < %240,)00 0 %250,)00

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

Chapter 7

7-13

SOLUTIONS TO PRO+LE,S Solution P7-1 1 *oss on constructive retirement of bonds 7urc#ase price o' %50,000 par bonds :pril 1, 2011 ;oo& value o' bonds ac2uired. 7ar value 4ess. ?namorti1ed discount %1,)00 'or 2! o' 5 mont#s *%1,)00 $!5+ ;oo& value o' bonds Intercompany bonds 4oss on constructive retirement o' bonds 2 Interest income and expense Interest income in consolidated income statement 2011 Interest expense in consolidated income statement 2011 %),)00 / *%),)00 =4 year 50%+ 3 Interest receivable and pa!able Interest receivable in consolidated balance s#eet at @ecember 1, 2011 Interest payable in consolidated balance s#eet at @ecember 1, 2011 4 Consolidation wor%ing paper entries 4oss on constructive retirement o' bonds 4,)00 )% bonds payable 49,100 Interest income 2,100 Investment in 7an bonds 52,!00 Interest expense , 00 "o eliminate reciprocal interest income and expense amounts and reciprocal bond investment and liability amounts and enter unrecogni1ed constructive loss$ Interest payable 1,000 Interest receivable "o eliminate reciprocal payables and receivables$ 1,000 0 % 1,000 0 % 5,500 %5 ,500 %100,000 2,400 9!,500 50%

4),)00 % 4,)00

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

7-14

Intercompany Profit Transactions Bonds

Solution P7-2 P-. Cor oration an! St--l Cor oration Schedule to 'etermine "ew+s ,et Income and Controlling Interest Share of Consolidated ,et Income
7e(3s separate income )0% o' Sat3s net income %5,000 unreali1ed pro'it in Sat3s @ecember 1, 2011 Inventory %10,000 unreali1ed pro'it in Sat3s @ecember 1, 2012 Inventory %15,000 unreali1ed pro'it in 201 on sale o' land upstream )0% % 0,000 unreali1ed pro'it on sale o' e2uipment in 201 %!,500 depreciation on unreali1ed pro'it on e2uipment in 201 and 2014 %),000 constructive loss on purc#ase o' 7e(3s bonds in 2014 %2,000 piecemeal recognition o' constructive loss in 2014 7e(3s net income %5!5,000 %455,000 %52 ,500 2011 %500,000 < )0,000 2012 % !5,000 < 95,000 201 %450,000 < )),000 2014 %510,000 < 95,000 "otal %1,)45,000 < 50,000

5,000

<

5,000

/ 10,000

< 10,000

/ 12,000 / 0,000

/ /

12,000 0,000

<

!,500

<

!,500

<

15,000

),000

),000

<

2,000

<

2,000

7e(3s net income under t#e e2uity met#od e2uals t#e Controlling Interest S#are o' consolidated net income$ Solution P7-3 Income from Sum for 2011: S#are o' reported income o' Sum *%200,000 !5%+ :dd. ?nreali1ed pro'it in beginning inventory o' Sum 4ess. ?nreali1ed pro'it in ending inventory o' Sum :dd. 7iecemeal recognition o' gain on sale o' e2uipment to 7ad *%4),000=5 years+ !5% 4ess. ?nreali1ed gain on sale o' land to Sum 4ess. ?nreali1ed gain on sale o' building to Sum less piecemeal recognition t#roug# depreciation *%40,000 / %2,000+ :dd. Aain on constructive retirement o' 7ad bonds *%200,000 / %1)),000+ Income 'rom Sum

%50!,500

%2,1!2,000

% 150,000 24,000 * 0,000+ 5,000 *20,000+ * ),000+ 12,000 % 104,000

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

Chapter 7

7-15

Solution P7-3 *continued+ Investment in Sum at 'ecember &1( 2011: ?nderlying e2uity in Sum *%1,040,000 !5%+ 4ess. ?nreali1ed pro'it in Sum3s ending inventory 4ess. ?nreali1ed gain on e2uipment sold to 7ad *%4),000 / %24,000 recogni1ed+ !5% 4ess. ?nreali1ed gain on sale o' land to Sum 4ess. ?nreali1ed gain on sale o' building to Sum *%40,000 / %2,000 recogni1ed+ :dd. Aain on constructive retirement o' 7ad3s bonds Investment in Sum @ecember 1 ,oncontrolling interest share: ,et income o' Sum %200,000 :dd. 7iecemeal recognition o' gain on e2uipment *%4),000=5 years+ ),000 Sum3s reali1ed income 20),000 ,oncontrolling interest percentage 25% ,oncontrolling interest s#are % 52,000 %!)0,000 * 0,000+ *1),000+ *20,000+ * ),000+ 12,000 %5)5,000

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

7-16

Intercompany Profit Transactions Bonds

Solution P7-3 *continued+ Pa! Cor oration an! Sub"i!iar# Consolidation Ior&ing 7aper 'or t#e year ended @ecember 1, 2011
*in t#ousands+

7ad Income Statement Sales Aain on land Aain on building Income 'rom Sum Aain on bonds Cost o' sales @epreciation expense Interest expense Bt#er expenses Consolidated ,I ,oncontrolling int$ s#are Controlling s#are o' ,I % -etained .arnings Fetained earnings 7ad Fetained earnings Sum Controlling s#are o' ,I @ividends Fetained earnings @ecember 1 alance Sheet Cas# ;ond interest receivable Bt#er receivables Inventories 4and ;uildings net 82uipment net Investment in Sum stoc& % % 1,250 20 40 104 !00 J 152 J 40J 92J

Sum !5% % 1,000

:d-ustments and 8liminations b 100 ' 20 m 40 9 104 @ 0 g 12 b 100 c 24 e ) m 2

Consolidated Statements %2,150

12 1,205 J 222 J 40J 212 J 492 52J 440 00 440

500 J )0J

120 J & 52 % % % 200 200 150 J i 200 # 120 & 40 % a 20 - 10 a 20 d 0 ' 20 m ) e 24 i !50 %

440 00 440 20 J

200

20 J 420 2 5 120 2 0 00 522 4 5

% %

420 54 )0 150 1)0 00 2)0 5)5

% %

240 152 10 50 100 140 50 1)0

c e # 1)) %1,200 % 150

24 24 15

Investment in 7ad bonds %1,!40 :ccounts payable ;ond interest payable 10% bonds payable Common stoc& Fetained earnings % 100 20 400 )00 420 %1,!40

g 1)) %1,944 % - 10 g 200 i )00 250 10 200 )00 420

)00 240 %1,200

,oncontrolling interest >anuary 1 ,oncontrolling interest @ecember 1

i 250 & 12

254 %1,944

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

Chapter 7

7-17

Solution P7-4 "reliminar! Computations: :c2uisition price Implied 'air value o' S#e *% 20,000 = )0%+ S#e3s boo& value 8xcess allocated to plant K e2uipment (it# ) year li'e :nnual depreciation o' excess *%100,000 = ) years+ 1 *oss is from the constructive retirement of bonds 7urc#ase price o' bonds ;oo& value o' bonds *%100,000 < % ,000 premium+ 4oss on retirement o' bonds Consolidated sales Combined sales 4ess. Intercompany sales Consolidated sales Consolidated cost of goods sold Combined cost o' goods sold 4ess. Intercompany sales 4ess. ?nreali1ed pro'its in beginning inventory :dd. ?nreali1ed pro'its in ending inventory Consolidated cost o' goods sold /nreali0ed profit in beginning inventor! Horced computations *%1!0,000 < %10,000+ / *%50,000 < %110,000+ /nreali0ed profit in ending inventor! Combined inventories *%100,000 < %50,000+ 4ess. Consolidated inventories ?nreali1ed pro'it in ending inventory Consolidated accounts receivable Combined accounts receivable *%120,000 < %50,000+ 4ess. Intercompany receivables Consolidated accounts receivable ,oncontrolling interest share S#e3s reported net income 4ess. @epreciation o' excess :dd. ?nreali1ed pro'it in beginning inventory 4ess. ?nreali1ed pro'it in ending inventory S#er3s reali1ed income ,oncontrolling interest percentage ,oncontrolling interest s#are % 20,000 % 400,000 * 00,000+ % 100,000 % 12,500 %105,000 10 ,000 % ,000 %2)0,000 50,000 %2 0,000 %1!0,000 *50,000+ *20,000+ 10,000 %110,000 % 20,000

%150,000 140,000 % 10,000 %1)0,000 15,000 %155,000 % 0,000 *12,500+ 20,000 *10,000+ 2!,500 20% % 5,500

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

7-18

Intercompany Profit Transactions Bonds

Solution P7-4 *continued+ % ,oncontrolling interest 'ecember &1( 201& ;eginning noncontrolling interest **% 5,000 < %!5,000 unamorti1ed excess+ 20%+ 4ess. ?nreali1ed pro'it in beginning inventory *%20,000 20%+ 4ess. ,oncontrolling interest dividends *%15,000 20%+ :dd. ,oncontrolling interest s#are ,oncontrolling interest @ecember 1

% )2,000 *4,000+ * ,000+ 5,500 % )0,500

1lternative computation: 8nding e2uity o' S#e **% 50,000 < %52,500 unamorti1ed % )2,500 excess* 20%+ *2,000+ 4ess. ?nreali1ed pro'it in ending inventory *%10,000 20%+ ,oncontrolling interest @ecember 1, 201 % )0,500 & Investment in She stoc% at 'ecember &1( 2012 Investment in S#e stoc& at cost :dd. C#anges in retained earnings to @ecember 1, 2012 *%1 5,000 / %100,000+ )0% 4ess. )0% o' 8xcess o' *%100,000=) years x )0%+ 0 %10,000 per year 2 years+ 4ess. ?nreali1ed pro'it in beginning inventory *%20,000 )0%+ Investment in S#e stoc& @ecember 1, 2012 1lternative computation: Investment in S#e stoc& @ecember 1, 201 4ess. Income 'rom S#e 'or 201 :dd. @ividends 'rom S#e *%15,000 )0%+ Investment in S#e stoc& @ecember 1, 2012 1' Income from She S#are o' S#e3s reported net income 4ess. @epreciation on excess *%100,000=) years+ :dd. ?nreali1ed pro'it in beginning inventory 4ess. ?nreali1ed pro'it in ending inventory S#e3s ad-usted and reali1ed income 7et3s )0% controlling s#are 4ess. Constructive loss on retirement o' bonds *% ,000 / %1,000+ 7et3s income 'rom S#e % 20,000 2),000 *20,000+ *15,000+ % 12,000 % 20,000 *20,000+ 12,000 % 12,000 % 0,000 *12,500+ 20,000 *10,000+ % 2!,500 % 22,000 *2,000+ % 20,000

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

Chapter 7

7-19

Solution P7-5 C:IC7: adaptedD 1 2 Consolidated cas# *%50,000 < %15,000+ 82uipment net *%)00,000 e2uipment / % 20,000 accumulated depreciation / %21,000 unreali1ed pro'it < %!,000 pro'it reali1ed t#roug# depreciation o' excess+ Investment in Sa( does not appear in consolidated statements$ ;onds payable *Sa(3s bonds payable o' %200,000 1=2 #eld outside t#e consolidated entity+ Common stoc& *7oe3s stoc&+ ;eginning retained earnings *7oe3s retained earnings+ @ividends paid *7oe3s dividends+ Aain on retirement o' bonds *;oo& value o' Sa(3s bonds ac2uired by 7oe %100,000 less ac2uisition cost o' %91,000$ Since bonds (ere ac2uired on @ecember 1, 2011, none o' t#e %9,000 gain #as been amorti1ed$+ Cost o' goods sold *%)50,000 combined / %50,000 intercompany sales < %10,000 unreali1ed pro'it in ending inventory+ Interest expense *Sa( paid interest 'or t#e entire year to outside entities so all o' Sa(3s interest is reported+ @epreciation expense *%45,000 combined / depreciation on t#e unreali1ed gain %!,000+ %100,000 %100,000 %2!2,000 % )0,000 % 55,000

%455,000

3 4 5 $ 7 %

9,000

&

%)10,000 % 15,000 % ),000

1' 11

Solution P7-$ Income from Sal for 2012: S#are o' reported income o' Sal *%100,000 !5%+ :dd. ?nreali1ed pro'it in beginning inventory o' Sal 4ess. ?nreali1ed pro'it in ending inventory o' Sal :dd. 7iecemeal recognition o' gain on sale o' e2uipment to 7ar *%24,000=5 years+ !5% 4ess. ?nreali1ed gain on sale o' land to Sal 4ess. ?nreali1ed gain on sale o' building to Sal less piecemeal recognition t#roug# depreciation *%20,000 / %1,000+ :dd. Aain on constructive retirement o' 7ar bonds *%100,000 / %94,000+ Income 'rom Sal 'or 2012 % !5,000 12,000 *15,000+ ,000 *10,000+ *19,000+ 5,000 % 52,000

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

7-20

Intercompany Profit Transactions Bonds

Solution P7-$ *continued+ Investment in Sal at 'ecember &1( 2012. ?nderlying e2uity in Sal *%520,000 !5%+ 4ess. ?nreali1ed pro'it in Sal3s ending inventory 4ess. ?nreali1ed gain on e2uipment sold to 7ar *%24,000 / %12,000 recogni1ed+ !5% 4ess. ?nreali1ed gain on sale o' land to Sal 4ess. ?nreali1ed gain on sale o' building to Sal *%20,000 / %1,000 recogni1ed+ :dd. Aain on constructive retirement o' 7ar3s bonds Investment in Sal @ecember 1 ,oncontrolling interest share: ,et income o' Sal :dd. 7iecemeal recognition o' gain on e2uipment *%24,000=5 years+ Sal3s reali1ed income ,oncontrolling interest percentage ,oncontrolling interest s#are %100,000 4,000 104,000 25% % 25,000 % 90,000 *15,000+ *9,000+ *10,000+ *19,000+ 5,000 % 4 ,000

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

Chapter 7

7-21

Solution P7-$ *continued+ Par Cor oration an! Sub"i!iar# Consolidation Ior&ing 7apers 'or t#e year ended @ecember 1, 2012 *in t#ousands+
7ar Income Statement Sales Aain on plant Income 'rom Sal Aain on bonds Cost o' sales @epreciation expense Interest expense Bperating expense Consolidated ,I ,oncontrolling int$ s#are Controlling s#are o' ,I % -etained .arnings Fetained earnings 7ar Fetained earnings Sal Controlling s#are o' ,I @ividends Fetained earnings @ecember 1 alance Sheet Cas# ;ond interest receivable Bt#er receivables Inventories 4and ;uildings net 82uipment net Investment in Sal stoc& % 5 0 0 52 50 J !5J 20J 45J % Sal !5% 500 b ' # d :d-ustments and 8liminations 50 0 52 15 g b c e ' 5 50 12 4 1 Consolidated Statements %1,0)0

5 50 J 111 J 20J 105 J 245 25J 220

00 J 40J

50J & 25 %

220

100

150 % 220 150 J 100 100 )0J i 100

150 220

# &

50 20 %

150 J 210

210

120

2! 40 )0 90 150 140 4

)1 5 0 50 !0 1)0 90

10 a d ' ' e i 5 10 15 10 19 12 !5

11) 50 115 150 11 21)

c e # % % 94 500 )0

12 12 )

Investment in 7ar bonds % :ccounts payable ;ond interest payable 10% bonds payable Common stoc& Fetained earnings % )!0 50 10 200 400 210 )!0

94 % % 9!2 1 0 5 100 400 210

400 120 500

5 g 100 i 400

,oncontrolling interest >anuary 1 ,oncontrolling interest @ecember 1

i 125 & 5

12!

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all

7-22
J @educt

Intercompany Profit Transactions Bonds % 9!2

62011 7earson 8ducation, Inc$ publis#ing as 7rentice 9all