Concept explainers
a
Introduction: Intercompany sale of bonds is a situation where the company sells its own bonds to its subsidiary. In this case, it cannot sale bonds to its subsidiary as an investment in its own bonds to itself, as the entity is now a consolidated entity, thus all amounts linked to intercompany obligation must be eliminated, including bonds investment, payable any unamortized discount or premium, the interest income or expenses or any accrued interest receivable or payable.
The computation of the
a
Answer to Problem 8.28AP
The value of goodwill as of January 1, 20X7 is $50,000.
Explanation of Solution
Computation of goodwill
| Particulars | Amount $ |
| Fair value of consideration given by T | 1,152,000 |
| Fair value of non-controlling interest at acquisition | 128,000 |
| Total | 1,280,000 |
| Book value of net assets at acquisition | (1,200,000) |
| Differential at acquisition | 80,000 |
| Increase in fair value of land | (30,000) |
| Goodwill at acquisition | 50,000 |
b
Introduction: Intercompany sale of bonds is a situation where the company sells its own bonds to its subsidiary. In this case, it cannot sale bonds to its subsidiary as an investment in its own bonds to itself, as the entity is now a consolidated entity, thus all amounts linked to intercompany obligation must be eliminated, including bonds investment, payable any unamortized discount or premium, the interest income or expenses or any accrued interest receivable or payable.
The computation of balance of T’s investment in S’s stock as of January 1. 20X7.
b
Answer to Problem 8.28AP
The balance of T’s investment in B’ stock on January 1, 20X7 $1,197,000
Explanation of Solution
Computation of balance in investment account, January 1, 20X7:
| Particulars | Amount $ |
| B’s | |
| Common stock | 500,000 |
| Premium on common stock | 280,000 |
| | 470,000 |
| Stockholders’ equity, January 1, 20X7 | 1,250,000 |
| Book value of shares held by T | 1,125,000 |
| Differential at January 1, 20X7 | 72,000 |
| Balance in investment in B stock January 1, 20X7 | 1,197,000 |
c
Introduction: Intercompany sale of bonds is a situation where the company sells its own bonds to its subsidiary. In this case, it cannot sale bonds to its subsidiary as an investment in its own bonds to itself, as the entity is now a consolidated entity, thus all amounts linked to intercompany obligation must be eliminated, including bonds investment, payable any unamortized discount or premium, the interest income or expenses or any accrued interest receivable or payable.
The gain or loss on the constructive retirement of B’s bonds that should appear on consolidated income statement 20X7.
c
Answer to Problem 8.28AP
The gain on the constructive retirement of B’s bonds $24,000
Explanation of Solution
Computation of constructive gain on retirement of B’s bonds
| Particulars | Amount $ |
| Original proceeds from issue of B’s bonds | 1,010,000 |
| Premium amortized to January 2, 20X7 | (6,000) |
| Book | 1,004,000 |
| Price paid for B’s bonds by T | (980,000) |
| Gain on constructive retirement | 24,000 |
d
Introduction: Intercompany sale of bonds is a situation where the company sells its own bonds to its subsidiary. In this case, it cannot sale bonds to its subsidiary as an investment in its own bonds to itself, as the entity is now a consolidated entity, thus all amounts linked to intercompany obligation must be eliminated, including bonds investment, payable any unamortized discount or premium, the interest income or expenses or any accrued interest receivable or payable.
The income assigned to non-controlling interest 20X7.
d
Answer to Problem 8.28AP
Income assigned to non-controlling interest $9,210
Explanation of Solution
Computation of income assigned to non-controlling interest
| Particulars | Amount $ |
| B’s Net income 20X7 | 100,000 |
| Add: Intercompany profit realized in 20X7 | 4,500 |
| Constructive gain on retirement of bonds | 24,000 |
| Less: Unrealized intercompany profit | (5,400) |
| Constructive gain on retirement by separate affiliate (2,4000 /4) | (6,000) |
| Impairment of goodwill | (25,000) |
| Subsidiary income to be apportioned | 92,100 |
| Income to non-controlling interest | 9,210 |
e
Introduction: Intercompany sale of bonds is a situation where the company sells its own bonds to its subsidiary. In this case, it cannot sale bonds to its subsidiary as an investment in its own bonds to itself, as the entity is now a consolidated entity, thus all amounts linked to intercompany obligation must be eliminated, including bonds investment, payable any unamortized discount or premium, the interest income or expenses or any accrued interest receivable or payable.
The non-controlling interest as of December 31, 20X6.
e
Answer to Problem 8.28AP
The non-controlling interest as of December 31, 20X6 $132,550
Explanation of Solution
Computation of non-controlling interest
| Particulars | Amount $ |
| B’s stockholders’ December 31, 20X6 | 1,250,000 |
| Less: Intercompany profit realized in 20X7 | (4,500) |
| B’s realized equity, December 31, 20X6 | 1,245,500 |
| Differential assigned to land | 30,000 |
| Differential assigned to goodwill | 50,000 |
| 1,325,500 | |
| Total non-controlling interest December 31, 20X6 | 132,550 |
f
Introduction: Intercompany sale of bonds is a situation where the company sells its own bonds to its subsidiary. In this case, it cannot sale bonds to its subsidiary as an investment in its own bonds to itself, as the entity is now a consolidated entity, thus all amounts linked to intercompany obligation must be eliminated, including bonds investment, payable any unamortized discount or premium, the interest income or expenses or any accrued interest receivable or payable.
The elimination entries that would appear in consolidation work sheet
f
Explanation of Solution
| Particulars | Debit $ | Credit $ |
| Income from subsidiary | 90,000 | |
| Dividends declared | 36,000 | |
| Investment in B’s stock | 54,000 | |
| (Income from subsidiary eliminated) | ||
| Income to non-controlling interest | 9,210 | |
| Dividends declared | 4,000 | |
| Non-controlling interest | 5,210 | |
| (Assignment of income to non-controlling interest) | ||
| Common stock B | 500,000 | |
| Premium on common stock | 280,000 | |
| Retained earnings January 1 | 470,000 | |
| Differential | 80,000 | |
| Investment in B stock | 1,197,000 | |
| Non-controlling interest | 133,000 | |
| (Elimination of beginning investment in S’s stocks) | ||
| Land | 30,000 | |
| Goodwill | 50,000 | |
| Differential | 80,000 | |
| (Assignment of differential to Land and goodwill) | ||
| Goodwill impairment loss | 25,000 | |
| Goodwill | 25,000 | |
| (Recognize impairment of goodwill) | ||
| Bonds payable | 200,000 | |
| Investment in T Bonds | 200,000 | |
| (Elimination of intercompany bond holdings of T bonds) | ||
| Other income | 20,000 | |
| Other expenses | 20,000 | |
| (Elimination of intercompany interest payable and receivable) | ||
| Current payable | 5,000 | |
| Current receivables | 5,000 | |
| (Eliminate intercompany accrued interest holdings of T | ||
| Bonds payable | 1,000,000 | |
| Premium on bonds payable | 3,000 | |
| Other income (interest) | 125,000 | |
| Investment in S’s bonds | 985,000 | |
| Gain on retirement of bonds | 24,000 | |
| Other expenses (interest) | 119,000 | |
| (Elimination of intercompany bond holdings) | ||
| Retained earnings | 4,050 | |
| Non-controlling interest | 450 | |
| Cost of goods sold | 4,500 | |
| (Elimination of profit on beginning inventory) | ||
| Sales | 78,000 | |
| Cost of goods sold | 72,600 | |
| Inventory | 5,400 | |
| (Eliminate upstream sale of inventory) | ||
| Current payables | 9,000 | |
| Current receivables | 9,000 | |
| (Elimination of intercompany dividends owed) |
- Income from subsidiary eliminated by reversal entry $90,000 =
- Assignment of non-controlling interest
- Elimination of beginning investment balance
- Differential assigned to land and goodwill by debit and credit to differential account.
- Impairment of goodwill recognized by credit of goodwill account.
- Intercompany bond holding eliminated by reverse entry debit bond payable and credit investment in P bonds.
- Intercompany interest income and expenses eliminated by setoff entry
- Intercompany accrued interest income and accrued expenses eliminated by setoff entry
- Elimination of intercompany bond holdings
- Elimination of profit on beginning inventory
- Elimination of upstream intercompany sale of inventory
- Intercompany dividends payable and receivable eliminated by setoff
Dividends declared
Investment in S’s stocks
Non-controlling interest
Other income
Investment in S’s bonds
Gain on retirement of bonds
Other expenses interest
Cost of goods sold
Retained earnings
Non-controlling interest
Cost of sales
Inventory
g
Introduction: Intercompany sale of bonds is a situation where the company sells its own bonds to its subsidiary. In this case, it cannot sale bonds to its subsidiary as an investment in its own bonds to itself, as the entity is now a consolidated entity, thus all amounts linked to intercompany obligation must be eliminated, including bonds investment, payable any unamortized discount or premium, the interest income or expenses or any accrued interest receivable or payable.
The preparation of consolidation worksheet for 20X7.
g
Answer to Problem 8.28AP
Consolidated net assets and retained earnings according to consolidation work sheet $7,280,600 and $471,890
Explanation of Solution
T Manufacturing and B Corporation
Consolidation worksheet
December 31, 20X7
| elimination | |||||
| Items | T | B | Debit $ | Credit $ | consolidation |
| Sales | 3,101,000 | 790,000 | 78,000 | 3,813,000 | |
| Income from subsidiary | 90,000 | 90,000 | |||
| Other income | 135,000 | 31,000 | 20,000 | ||
| 125,000 | 21,000 | ||||
| Gain on retirement | 24,000 | 24,000 | |||
| Less: | |||||
| Cost of goods sold | (2,009,000) | (430,000) | 4,500 | ||
| 72,600 | (2,361,000) | ||||
| (195,000) | (85,000) | (280,000) | |||
| Goodwill impairment | 25,000 | (25,000) | |||
| Other expenses | (643,000) | (206,000) | 20,000 | ||
| 119,000 | (710,000) | ||||
| Consolidated net income | 481,100 | ||||
| Income to NCI | 9,210 | (9,210) | |||
| Income carry forward | 479,000 | 100,000 | 347,210 | 240,100 | 471,890 |
| Retained earnings Jan 1 | 3,033,000 | 470,000 | 470,000 | ||
| 4,050 | 3,028,950 | ||||
| Income from above | 479,000 | 100,000 | 347,210 | 240,100 | 471,890 |
| Less Dividends | (50,000) | (40,000) | 36,000 | ||
| 4,000 | (50,000) | ||||
| Retained earnings | 3,462,000 | 530,000 | 821,260 | 280,100 | 3,450,840 |
| Cash | 39,500 | 29,000 | 68,500 | ||
| Current receivables | 112,500 | 85,100 | 5,000 | ||
| 9,000 | 183,600 | ||||
| Inventory | 301,000 | 348,900 | 5,400 | 644,500 | |
| Investments | |||||
| S’s Stock | 1,251,000 | 54,000 | |||
| 1,197,000 | |||||
| B’s bonds | 985,000 | 985,000 | |||
| T’s bonds | 200,000 | 200,000 | |||
| Land | 1,231,000 | 513,000 | 30,000 | 1,774,000 | |
| Buildings & equipment | 2,750,000 | 1,835,000 | 4,585,000 | ||
| Goodwill | 50,000 | 25,000 | 25,000 | ||
| Differential | 80,000 | 80,000 | |||
| Total Assets | 6,670,000 | 3,011,000 | 7,280,600 | ||
| 1,210,000 | 619,000 | 1,829,000 | |||
| Current payables | 98,000 | 79,000 | 5,000 | ||
| 9,000 | |||||
| Bonds payable | 200,000 | 1,000,000 | 200,000 | ||
| 1,000,000 | |||||
| Premium on bonds | 3,000 | 3,000 | |||
| Common stock | 1,000,000 | 500,000 | 500,000 | 1,000,000 | |
| Premium stock | 700,000 | 280,000 | 280,000 | 700,000 | |
| Retained earnings | 3,462,000 | 530,000 | 821,260 | 280,100 | 3,450,840 |
| Non-controlling interest | 450 | 5,210 | |||
| 133,000 | 137,760 | ||||
| Total Liabilities and equity | 6,670,000 | 3,011,000 | 2,978,710 | 2,978,710 | 7,280,600 |
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Chapter 8 Solutions
EBK ADVANCED FINANCIAL ACCOUNTING
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