Chapter 8, Problem 8.28AP

a

To determine

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 goodwill as of January 1, 20X7.

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

To determine

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.

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 stockholders’ equity, January 1, 20X7:
Common stock	500,000
Premium on common stock	280,000
Retained earnings	470,000
Stockholders’ equity, January 1, 20X7	1,250,000
Book value of shares held by T $\$1,250,000\times .90$	1,125,000
Differential at January 1, 20X7 $\$80,000\times .90$	72,000
Balance in investment in B stock January 1, 20X7	1,197,000

c

To determine

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.

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 $(\$10,000÷10years)\times 6$	(6,000)
Book value of bonds at constructive retirement	1,004,000
Price paid for B’s bonds by T $\$1,000,000\times .98$	(980,000)
Gain on constructive retirement	24,000

d

To determine

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.

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 $\$15,000\times 0.30$	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 $\$92,100\times .10$	9,210

e

To determine

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.

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 $\$15,000\times 0.30$	(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 $\$1,325,500\times 0.10$	132,550

f

To determine

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

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)

1. Income from subsidiary eliminated by reversal entry $90,000 = $\$100,000\times .90$ . Dividends declared $36,000 = $\$40,000\times .90$ .
2. Assignment of non-controlling interest

$\$9,210=[\$100,000+(24,000-\$6,000)+\$4,500-\text{}\$5,400\text{}-\$25,000]\times .10$

Dividends declared $\$4,000=\$40,000\times .10$

3. Elimination of beginning investment balance

$\$80,000=\$1,280,000-\$1,200,000$

Investment in S’s stocks $\$1,197,000=(\$500,000+\$280,000+\$470,000+\$80,000)\times .90$

Non-controlling interest $\$133,000=(\$500,000+\$280,000+\$470,000+\$80,000)\times .10$

4. Differential assigned to land and goodwill by debit and credit to differential account.
5. Impairment of goodwill recognized by credit of goodwill account.
6. Intercompany bond holding eliminated by reverse entry debit bond payable and credit investment in P bonds.
7. Intercompany interest income and expenses eliminated by setoff entry
8. Intercompany accrued interest income and accrued expenses eliminated by setoff entry
9. Elimination of intercompany bond holdings

Other income $\$125,000=(\$1,000,000\times .12)+\text{}5,000Amortizationofpremium$

Investment in S’s bonds $\$985,000=(\$1,000,000\times .98)+\text{}5,000Amortizationofpremium$

Gain on retirement of bonds $\$24,000=\$1,004,000-980,000$

Other expenses interest $\$119,000=(\$1,000,000\times .12)-\$1,000$

10. Elimination of profit on beginning inventory

Cost of goods sold $\$4,500=\$15,000\times .30$

Retained earnings $\$4,050=\$4,500\times .90$

Non-controlling interest $\$450=\$4,500\times .10$

11. Elimination of upstream intercompany sale of inventory

Cost of sales $\$72,600=(\$78,000-\$18,000)+(\$18,000\times .70)$

Inventory $\$5,400=\$18,000\times .30$

12. Intercompany dividends payable and receivable eliminated by setoff

$\$9,000=\$10,000\times .90$

g

To determine

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.

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)
Depreciation $ amortization	(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
Accumulated depreciation	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