Exam 7: Intercompany Profit Transactions - Bonds

Sabu is a 65%-owned subsidiary of Peerless.On January 1,2012,Sabu issued $1,000,000 of $1,000 face amount 8% bonds at $980 per bond.The bonds have interest payments on December 31 of each year and mature on January 1,2017.On January 1,2013,Peerless purchased all 1,000 bonds on the open market for $1,010 per bond.Straight-line amortization is used by both companies. Required: With respect to the bonds,use General Journal format to: 1.Record the journal entries on Sabu's books made from 2012 to 2017. 2.Record the journal entries on Peerless' books made from 2012 to 2017. 3.Record the elimination entries for the consolidation working papers for 2012 through 2017.

If an affiliate purchases bonds in the open market,the book value of the intercompany bond liability at the time of purchase is

Pelami Corporation owns a 90% interest in Sunbird Corporation.At December 31,2012,Sunbird had $3,000,000 of par value 6% bonds outstanding with an unamortized premium of $30,000.The bonds have interest payment dates of January 1 and July 1 and mature on January 1,2017. On January 2,2013,Pelami purchased $1,200,000 par value of Sunbird's outstanding bonds for $1,210,000.Assume straight-line amortization. Required: Prepare the necessary consolidation working paper entries with respect to the intercompany bonds for the year ending December 31,2013.

Pass Corporation owns 80% of Sindy Company,purchased at the underlying book value on January 1,2010.On January 1,2013,Pass also purchased $200,000 par value 6% bonds that had been issued by Sindy on January 1,2010 with a ten-year maturity(due January 1,2020).Annual interest is paid on December 31.Straight-line amortization is used by both companies. At year-end 2013,the following entry was made on the consolidating worksheet. Required: 1.How much did Pass pay for the bonds? 2.What is the book value of the bonds on the date of purchase? 3.What amount of interest income and interest expense must be eliminated in the entry above designated as (a)and (b)?

Padma Corporation owns 70% of the outstanding stock of Somega Company.On January 1,2012,Somega issued $2,000,000 in 6% bonds that matured on January 1,2022.At the time of issuance,the bonds were sold at a premium of $250,000.At January 1,2013,Padma purchased half of the bonds for $910,000,and constructively retired the debt.Annual interest is paid on December 31.Straight-line amortization is used by both companies. Required: Complete the table below with respect to the account balances that Padma,Somega and the consolidated entity would report on their respective financial statements.

Separate company and consolidated income statements for Pitta and Sojourn Corporations for the year ended December 31,2013 are summarized as follows: The interest income and expense eliminations relate to a $100,000,9% bond issue that was issued at par value and matures on January 1,2018.On January 2,2013,a portion of the bonds was purchased and constructively retired. Required: Answer the following questions. 1.Which company is the issuing affiliate of the bonds payable? 2.What is the gain or loss from the constructive retirement of the bonds payable that is reported on the consolidated income statement for 2013? 3.What portion of the bonds payable is held by nonaffiliates at December 31,2013? 4.Is Sojourn 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 the calculation of Pitta's $19,900 income from Sojourn.

If the price paid by a parent company to acquire the debt of a subsidiary is greater than the book value of the liability,a ________ occurs.

Snackle Inc.is a 90%-owned subsidiary of Pasha Corp.On January 1,2013,Snackle issued $400,000 of $1,000 face amount 8% 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 2,2014,Pasha purchased all 400 bonds on the open market for $1,030 per bond.The bonds mature on December 31,2015.Both companies use straight-line amortization. Required: With respect to the bonds,use General Journal format to: 1.Record the 2014 journal entries from July 1 to December 31 on Pasha's books. 2.Record the 2014 journal entries from July 1 to December 31 on Snackle's books. 3.Record the elimination entries for the consolidation working papers for the year ending December 31,2014.

Use the following information to answer the question(s)below. Plenty Corporation issued six thousand,$1,000 par,6% bonds on January 1,2012,at par.Interest is paid on January 1 and July 1 of each year;the bonds mature on January 1,2017.On January 2,2014,Scrawn Corporation,a 75%-owned subsidiary of Plenty,purchased 3,000 of the bonds on the open market at 102.50.Plenty's separate net income for 2014 included the annual interest expense for all 3,000 bonds.Scrawn's separate net income for 2014 was $400,000,which included the bond interest received on July 1 as well as the accrual of bond interest revenue earned on December 31.Both companies use straight-line amortization of bond discounts/premiums. -What was the amount of gain or (loss)from the intercompany purchase of Plenty's bonds on January 2,2014?

Pickle Incorporated acquired a $10,000 bond originally issued by its 80%-owned subsidiary on January 2,2013.The bond was issued in a prior year for $11,250,matures January 1,2018,and pays 9% interest at December 31.The bond's book value at January 2,2013 is $10,625,and Pickle paid $9,500 to purchase it.Straight-line amortization is used by both companies.How much interest income should be eliminated in 2013?

There are several theories for allocating constructive gains or losses between purchasing and issuing affiliates.The Agency Theory

Pare Corporation owns 65% of the outstanding voting stock of Summer Corporation.On January 1,2013,Pare purchased $4,000,000 of bonds that were originally issued by Summer several years earlier.The ten-year bonds have a 5% interest rate,and pay interest each December 31. The bonds were originally issued at a discount of $206,080,but at January 1,2013,they have a book value of $3,896,960.Pare paid $4,067,935 for the bonds and will amortize the premium over the next five years when the bonds mature.Both companies use the straight-method of amortization. Required: 1.Calculate the interest expense for 2013 that will be recorded by Summer. 2.Calculate the interest income for 2013 that will be recorded by Pare. 3.Calculate the Gain/Loss on retirement of bonds payable that will be reported on the consolidated financial statements for the year ending December 31,2013.

Using the original information,the amount of consolidated Interest Expense for 2014 was

Paleo Corporation holds 80% of the capital stock of Sockrite Company.On January 1,2013,Sockrite purchased $50,000 par value,10% bonds on the open market that had been issued by Paleo on January 1,2011.Sockrite paid $58,000 for these bonds which had originally been issued by Paleo for $53,000,with a 10-year maturity from the date of issue.Interest is paid annually on December 31.Straight-line amortization is used by both companies. Required: 1.Calculate the interest income reported by Sockrite related to these bonds in 2013. 2.Calculate the interest expense reported by Paleo related to these bonds in 2013. 3.Calculate the gain or loss on retirement of bonds payable to be reported on consolidated financial statements in 2013.

Bonds issued by a company remain on their books as a liability,but are considered constructively retired when

Spott is a 75%-owned subsidiary of Penthal.On January 1,2013,Spott issued $900,000 of $1,000 face amount 8% bonds at par.The bonds have interest payments on January 1 and July 1 of each year and mature on January 1,2017.On July 2,2014,Penthal purchased all 900 bonds on the open market for $1,020 per bond.Both companies use straight-line amortization. Required: With respect to the bonds,use General Journal format to: 1.Record the 2014 journal entries from July 1 to December 31 on Spott's books. 2.Record the 2014 journal entries from July 1 to December 31 on Penthal's books. 3.Record the elimination entries for the consolidation working papers for the year ending December 31,2014.

Pachelor Corporation owns 70% of the outstanding stock of Stabb Company.On January 1,2013,Stabb issued $1,000,000 in 7% bonds that matured on January 1,2018.At the time of issuance,the bonds were sold at a discount of $125,000.At January 2,2015,Pachelor purchased the bonds for $1,400,000,and constructively retired the debt.Interest is paid annually on January 1.Straight-line amortization is used by both companies. Required: 1.Calculate the gain or loss that the consolidated entity incurred to retire the debt. 2.Prepare eliminating/adjusting entries for the consolidating work papers for the year ended December 31,2015.

Use the following information to answer the question(s)below. Pascalian Company owns a 90% interest in Sapp Company.On January 1,2013,Pascalian had $300,000,6% bonds outstanding with an unamortized premium of $9,000.The bonds mature on December 31,2017.Sapp acquired one-third of Pascalian's bonds in the open market for $97,000 on January 1,2013.Both companies use straight-line amortization of bond discounts/premiums.Interest is paid on December 31.On December 31,2013,the books of the two affiliates held the following balances: -Prussia Corporation owns 80% the voting stock of Stad Corporation.On January 1,2013,Prussia paid $391,000 cash for $400,000 par of Stad's 10% $1,000,000 par value outstanding bonds,due on April 1,2018.Stad's bonds had a book value of $1,045,000 on January 1,2013.Straight-line amortization is used.The gain or loss on the constructive retirement of $400,000 of Stad bonds on January 1,2013 was reported in the 2013 consolidated income statement in the amount of

Pongo Company has $2,000,000 of 6% bonds outstanding on December 31,2013 with unamortized premium of $60,000.These bonds pay interest semiannually on January 1 and July 1 and mature on January 1,2019.Straight-line amortization is used. Syring Inc. ,90%-owned subsidiary of Pongo,buys $1,000,000 par value of Pongo's outstanding bonds in the market for $980,000 on January 2,2014.There is only one issue of outstanding bonds of the affiliated companies and they have consolidated financial statements. For the year 2014,Pongo has income from its separate operations (excluding investment income)of $3,000,000 and Syring reports net income of $200,000.Pongo uses the equity method to account for the investment. Required: Determine the following: 1.Noncontrolling interest share for 2014. 2.Controlling share of consolidated net income for Pongo Company and subsidiary for 2014.

Use the following information to answer the question(s)below. Pfadt Inc.had $600,000 par of 8% bonds payable outstanding on January 1,2013 due January 1,2017 with an unamortized discount of $12,000.Senat is a 90%-owned subsidiary of Pfadt.On January 2,2013,Senat Corporation purchased $150,000 par value of Pfadt's outstanding bonds for $152,000.The bonds have interest payment dates of January 1 and July 1.Straight-line amortization is used. -Bonds Payable appeared in the December 31,2013 consolidated balance sheet of Pfadt Corporation and Subsidiary in the amount of