Beruflich Dokumente
Kultur Dokumente
Accounting
Jeter ● Chaney
Intercompany Bond
Holdings and
Miscellaneous Topics—
Consolidated Financial
Statements
1
Prepared by Sheila Ammons, Austin Community College
Learning Objectives
• Describe the term “constructive retirement of debt”.
• Describe how the gain or loss on constructive retirement of
intercompany bond holdings is allocated between the
purchasing and issuing companies.
• Explain the impact on the consolidated financial statements
when a company issues a note to an affiliated company,
which then discounts the note with an outside company.
• Determine the effect on the consolidated financial
statements when a subsidiary issues a stock dividend.
• Understand the difference in how stock dividends and cash
dividends issued by a subsidiary company affect the
consolidated financial statements.
2
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.
Learning Objectives
• Determine the impact on the investment account when a
subsidiary issues a stock dividend from preacquisition
earnings and from postacquisition earnings.
• Explain how the purchase price is allocated when the
subsidiary has both common and preferred stock
outstanding.
• Determine the controlling interest in income when the
parent company owns both common and preferred stock
of the subsidiary.
3
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.
Intercompany Bond Holdings
• An affiliate company may purchase bonds issued by another
affiliate directly from the issuing company or from outsiders after
the original issue.
• Because the bonds are held within the affiliated group, the
intercompany
– bond investments (receivable),
– bonds payable (liability),
– intercompany interest expense and,
– intercompany interest revenue,
must be eliminated.
• Bonds not held by external parties are viewed as being
constructively retired in the consolidated financial statements.
This is viewed as early retirement of debt.
7% Discount Carrying
Date Interest Amortized Amount
1/1/13 $ 85,000
12/31/13 $ 7,000 $ 5,000 * 90,000
12/31/14 7,000 5,000 95,000
12/31/15 7,000 5,000 100,000
+ $10,000 - $15,000
Constructive gain Constructive loss
- $5,000
Net constructive loss
- $10,000 + $15,000
Constructive loss Constructive gain
+ $5,000
Net constructive gain
Note:
The usual practice of recording a bond investment does not separate the
discount or premium.
Since the bonds were purchased on the open market, there is no entry
made on the issuing company’s books.
- $12,000 - $10,000
Constructive loss Constructive loss
P S Eliminations Consolidated
Balance Sheet Company Company Debit Credit (2) NCI Balances
Investment in S Co. bonds 310,000 10,000 (4) -
(1) 300,000 (6)
Investment in S. Co. stock 1,200,000 160,000 1,360,000 -
Other assets 5,420,000 2,620,000 8,040,000
Total assets 6,930,000 2,620,000 (4) 8,040,000
9% bonds payable 500,000 300,000 (3) 200,000
Discount on bonds payable (20,000) 12,000 (8,000)
Other liabilities 2,134,000 335,000 (6) 2,469,000
Capital stock 3,000,000 1,000,000 1,000,000 3,000,000
Retained earnings 1,796,000 805,000 738,000 176,000 (6) 18,600 2,020,400
NCI in net assets 1/1 ** 340,000 340,000 -
NCI in net assets 12/31 358,600 358,600
Total liab. & equity 6,930,000 2,620,000 2,198,000 2,198,000 8,040,000
Entries (2) and (3) recognize the constructive loss allocated to each company and adjust bond
investment and carrying value of the intercompany debt to par value.
If the complete equity method is used, entry (1), the reciprocity entry, is
not needed and the following entry replaces entry (5) above.
Balance Sheet
(1)
Investment in S Co. bonds 310,000 10,000 (2) -
300,000 (3)
Investment in S. Co. stock 1,424,400 64,400 (4) -
1,360,000
Other assets 5,420,000 2,620,000 8,040,000
Total assets 7,154,400 2,620,000 8,040,000
9% bonds payable 500,000 300,000 (2) 200,000
(1)
Discount on bonds payable (20,000) 12,000 (8,000)
Other liabilities 2,134,000 335,000 2,469,000
Capital stock 3,000,000 1,000,000 1,000,000 (4) 3,000,000
Retained earnings 2,020,400 805,000 802,400 16,000 18,600 2,020,400
NCI in net assets 1/1 340,000 (4) 340,000 -
NCI in net assets 12/31 358,600 358,600
Total liab. & equity 7,154,400 2,620,000 2,102,400 2,102,400 8,040,000
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Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.
Year Subsequent to Acquisition of Bonds, Entries
on the Books of Affiliated Companies—2016
P Company’s Books
Entries on June 30 and December 31
Cash 13,500
Interest Revenue 13,500
To record receipt of interest ($300,000 x 9% x 6/12).
S Company’s Books
Entries on June 30 and December 31
To adjust beginning retained earnings for constructive loss (recorded in prior year as
workpaper entry only; see 2015 entry (2) and to adjust investment to par.
* ($12,000 x 80%)
** ($12,000 x 20%)
Balance Sheet
Investment in S Co. bonds 307,500 2,500 (4) 10,000 (2) -
300,000 (7)
Investment in S. Co. stock 1,200,000 244,000 (1) 1,444,000 (9) -
Other assets 5,812,500 2,690,000 8,502,500
Total assets 7,320,000 2,690,000 8,502,500
9% bonds payable 500,000 300,000 (7) 200,000
Discount on bonds payable (15,000) 3,000 (5) 12,000 (3) (6,000)
Other liabilities 2,220,000 320,000 2,540,000
Capital stock 3,000,000 1,000,000 1,000,000 3,000,000
(9)
Retained earnings 2,100,000 885,000 899,600 324,500 16,600 2,393,300
NCI in net assets 1/1 2,400 361,000 358,600 -
(3) (9)
NCI in net assets 12/31 375,200 375,200
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Total liab. & equity 7,320,000 2,690,000 2,451,500 2,451,500 8,502,500
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.
Interim Purchase of Intercompany
Bonds
Had the bonds been held during 2015, P Company would have amortized a
portion of the premium and S Company would have amortized a part of the
discount.
Assuming that P Company amortized $500 and S Company amortized $600
during 2015, the original workpaper entries (2) and (3) for constructive
losses) are modified as follows:
2. Loss on Constructive Retirement Bonds 10,000
Interest Revenue 500
Investment in S Company Bonds 9,500
3. Loss on Constructive Retirement of Bonds 12,000
Interest Expense 600
Discount on Bonds Payable 11,400
LO 2 Allocating the constructive gain or34loss.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.
Interim Purchase of Intercompany
Bonds
• Notes:
– The consolidated income statement will still show a
total loss on the constructive retirement of $22,000.
– The credits to interest revenue and interest expense
add back the portion of the loss that was recorded by
the individual companies, but which is reported in
total in 2015.
– Failure to add back the $1,100 ($500 + $600) to the
reported income of the individual companies will
result in reporting this portion of the loss twice.
55
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.
Consolidating with Preferred Stock
Outstanding
Consolidated Statement Workpaper December 31, 2015 Cost Method Page 2
P S Eliminations Consolidated
Balance Sheet
Investment in S Company
Preferred stock 180,000 180,000 -
Common stock 1,160,000 1,160,000 -
Difference Implied and BV 45,000 45,000 -
Other assets 5,410,000 2,805,000 8,215,000
Total assets 6,750,000 2,805,000 8,215,000
Total liabilities 1,600,000 600,000 2,200,000
Preferred stock S Co. 500,000 500,000 -
Common stock 3,000,000 1,000,000 1,000,000 3,000,000
Other contributed capital
P Company 400,000 13,500 386,500
S Company 305,000 305,000 -
Retained earnings 1,750,000 400,000 200,000 60,000 1,890,000
NCI in net assets 1/1 31,500 420,000 678,500 -
290,000
NCI in net assets 12/31 738,500 738,500
Total liab. & equity 6,750,000 2,805,000 2,095,000 2,095,000 8,215,000
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Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.
Consolidating with Preferred Stock
Outstanding
Consolidated Statement Workpaper December 31, 2015 Cost Method Page 2
P S Eliminations Consolidated
Company Company Debit Credit NCI Balances
Balance Sheet
Investment in S Company
Preferred stock 180,000 180,000 -
Common stock 1,160,000 1,160,000 -
Difference Implied and BV 45,000 45,000 -
Other assets 5,410,000 2,805,000 8,215,000
Total assets 6,750,000 2,805,000 8,215,000
Total liabilities 1,600,000 600,000 2,200,000
Preferred stock S Co. 500,000 500,000 -
Common stock 3,000,000 1,000,000 1,000,000 3,000,000
Other contributed capital
P Company 400,000 13,500 386,500
S Company 305,000 305,000 -
Retained earnings 1,750,000 400,000 200,000 60,000 1,890,000
NCI in net assets 1/1 31,500 420,000 678,500 -
290,000
NCI in net assets 12/31 738,500 738,500
Total liab. & equity 6,750,000 2,805,000 2,095,000 2,095,000 8,215,000
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Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.