Exam 7: Intercompany Profit Transactions - Bonds

The parent,which controls all debt retirement for the consolidated entity can use its available resources to purchase and retire its own bonds if they choose not to use the fair value option.

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. -If the bonds were originally issued at 106,and 80% of them were purchased by Scrawn on January 2,2015 at 98,the gain or (loss)from the intercompany purchase was

Constructive retirement means that bonds are retired for consolidated statement purposes because the bond investment and payable items of the parent and the subsidiary are reciprocals that must be eliminated in consolidation.

Pass Corporation owns 80% of Sindy Company,purchased at the underlying book value on January 1,2013.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)?

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.

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.

The GAAP requires the effective interest method of amoritization on transactions between parent and subsidiary companies.

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.

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?

Popcorn Corporation owns 90% of the outstanding voting common stock of Salty Corporation.On January 1,2009,Salty 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 January 1,2017.On July 2,2014,Popcorn purchased all of the outstanding bonds at a price of $107.50.Both companies use straight-line amortization. Required: 1.Prepare the journal entries for July 1,2014 through December 31,2014 for Popcorn Corporation. 2.Prepare the journal entries for July 1,2014 through December 31,2014 for Salty Corporation. 3.Prepare the elimination entries necessary on the consolidating working papers for the year ended December 31,2014.

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: 6\% bonds payable \ 300,000 Premium on bonds 7,200 Interest expense 16,200 Investment in Pascalian bonds \ 97,600 Interst income 6,600 -Prussia Corporation owns 80% of 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

The fair value option for liabilities permits recognition of gains and losses due to changes in the market values.

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.

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.

Pheasant Corporation owns 80% of Sal Corporation's outstanding common stock that was purchased at book value equal to fair value on January 1,2007. Additional information: 1.Pheasant sold inventory items that cost $3,000 to Sal during 2014 for $6,000.One-half of this merchandise was inventoried by Sal at year-end.At December 31,2014,Sal owed Pheasant $2,000 on account from the inventory sales.No other intercompany sales of inventory have occurred since Pheasant acquired its interest in Sal. 2.Pheasant sold equipment with a book value of $5,000 and a 5-year useful life to Sal for $10,000 on December 31,2012.The equipment remains in use by Sal and is depreciated by the straight-line method.The equipment has no salvage value. 3.On January 2,2014,Sal paid $10,800 for $10,000 par value of Pheasant's 10-year,10% bonds.These bonds were originally sold at par value,and have interest payment dates of January 1 and July 1,and mature on January 1,2018.Straight-line amortization has been applied by Sal to the Pheasant bond investment. 4.Pheasant uses the equity method in accounting for its investment in Sal. Required: Complete the working papers to consolidate the financial statements of Pheasant Corporation and Sal for the year ended December 31,2014.

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.

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. -If the bonds were originally issued at 103,and 70% of them were purchased on January 2,2016 at 104,the constructive gain or (loss)on the purchase was

The loss on the retirement of bonds only appears in the consolidated income statement in the year in which we constructively retire the bonds.

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.

Platts Incorporated purchased 80% of Scarab Company several years ago when the fair value equaled the book value.On January 1,2013,Scarab has $100,000 of 8% bonds that were issued at face value and have five years to maturity.Interest is paid annually on December 31.Both Platts and Scarab would use the straight-line method to amortize any premium or discount incurred in the issuance or purchase of bonds.On January 1,2014,Platts purchased all of Scarab's bonds for $96,000. Required: 1.Prepare the journal entries in 2014 that would be recorded by Platts and Scarab on their separate financial records. 2.Prepare the consolidating working paper entries required for the year ending December 31,2014.