Test bank advanced accounting 10e by beams chapter 07

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Test Bank INTERCOMPANY PROFIT TRANSACTIONS – BONDS Multiple Choice Questions LO1 The intercompany purchase of the parent company bonds by a subsidiary has the same effect on the consolidated financial statements as the a purchase of the bonds by a non-affiliate b parent's retirement of the bonds using funds from newly issued common stock c parent's retirement of the bonds using funds from a subsidiary loan d parent's retirement of the bonds using funds from the sale of new bonds to non-affiliates LO1 If an affiliate purchases bonds in the intercompany bond liability book value is open market, the a always assigned to the parent company because it has control b the par value of the bonds less the discount or plus the premium and issuance costs at the time of issuance c par value d the par value of the bonds plus unamortized discount LO2 Material constructive gains and losses from intercompany bond holdings are a realized gains and losses from the issuing affiliate’s perspective b always assigned to the parent company because it has control c realized and recognized from the consolidated entity’s perspective d excluded from the consolidated income statement until the period in which they become realized ©2009 Pearson Education, Inc publishing as Prentice Hall 7-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Use the following information in answering questions and Australian Owl Company owns an 80% interest in Glider Company On January 1, 2006, Australian Owl had $600,000, 8% bonds outstanding with an unamortized premium of $9,000 The bonds mature on December 31, 2010 Glider acquired one-third of Australian Owl’s bonds in the open market for $198,000 on January 1, 2006 On December 31, 2006, the books of the two affiliates held the following balances: Australian Owl’s books 8% bonds payable Premium on bonds Interest expense $600,000 7,200 46,200 Glider’s books Investment in Australian Owl bonds Interest income $198,400 16,400 LO2 The gain from the bond purchase that appeared on the December 31, 2006 consolidated income statement was a b c d LO2 $ $4,400 $4,800 $5,000 Consolidated Interest Expense and consolidated Interest Income, respectively, that appeared on the consolidated income statement for the year ended December 31, 2006 was a b c d $30,800 $30,800 $46,200 $46,200 and and and and $ $16,400 $ $16,400 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO2 Kingfisher Corporation owns 80% the voting stock of Tunnel Corporation On January 1, 2006, Kingfisher paid $391,000 cash for $400,000 par of Tunnel’s 10% $1,000,000 par value outstanding bonds, due on April 1, 2011 Tunnel’s bonds had a book value of $1,045,000 on January 1, 2006 Straight-line amortization is used The gain or loss on the constructive retirement of $400,000 of Tunnel bonds on January 1, 2006 was reported in the 2006 consolidated income statement in the amount of a b c d $14,000 $21,000 $23,000 $27,000 Use the following information in answering questions 7, 8, and Rufous Owl Inc had $800,000 par of 10% bonds payable outstanding on January 1, 2006 due January 1, 2010 with an unamortized discount of $16,000 Bird is a 90%-owned subsidiary of Rufous On January 1, 2006, Bird Corporation purchased $160,000 par value of Rufous’s outstanding bonds for $152,000 The bonds have interest payment dates of January and July 1, and mature on January 1, 2009 Straight-line amortization is used LO2 With respect to the bond purchase, the consolidated income statement of Rufous Owl Corporation and Subsidiary for 2006 showed a gain or loss of a b c d LO2 $ 4,000 $ 4,800 $ 8,000 $10,200 Bond Interest Receivable for 2006 of Owl’s bonds on Bird’s books was a b c d $ 7,600 $ 8,000 $15,200 $16,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO2 Bonds Payable appeared in the December 31, 2006 consolidated balance sheet of Rufous Owl Corporation and Subsidiary in the amount of a b c d $624,000 $628,000 $630,400 $637,800 Use the following information for questions 10 through 15 Dollarbird Corporation issued five thousand, $1,000 par, 12% bonds on January 1, 2004 Interest is paid on January and July of each year; the bonds mature on January 1, 2009 On January 1, 2006, Branch Corporation, an 80%-owned subsidiary of Dollarbird, purchased 3,000 of the bonds on the open market at 101.50 Dollarbird's separate net income for 2006 included the annual interest expense for all 3,000 bonds Branch’s separate net income was $300,000, which included the bond interest received on July as well as the accrual of bond interest revenue earned on December 31 LO2 10 What was the amount of gain or (loss) from the intercompany purchase of Dollarbird’s bonds on January 1, 2006? a b c d LO2 11 $(60,000) $(45,000) $ 45,000 $ 60,000 If the bonds were originally issued at 106, and 80% of them were purchased by Branch on January 1, 2007 at 98, the gain or (loss) from the intercompany purchase was a b c d $(224,000) $(176,000) $ 176,000 $ 224,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-4 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO2 12 If the bonds were originally issued at 103, and 70% of them were purchased on January 1, 2008 at 104, the constructive gain or (loss) on the purchase was a b c d LO2 13 Using the original information, Interest Expense for 2006 was a b c d LO2 14 $ $ $ $ the amount of consolidated 120,000 240,000 300,000 600,000 Using the original information, the balances for the Bonds Payable and Bond Interest Payable accounts, respectively, on the consolidated balance sheet for December 31, 2007 were a b c d LO2 15 $(119,000) $(35,000) $35,000 $119,000 $2,000,000 $2,000,000 $5,000,000 $5,000,000 and and and and $120,000 $240,000 $120,000 $240,000 The elimination entries on the consolidation working papers prepared on December 31, 2006 included at least a debit to Bond Interest Expense for $360,000 b credit to Bond Interest Expense for $360,000 and a debit to Bond Interest Payable for $180,000 c credit to Bond Interest Receivable for $360,000 d debit to Bond Interest Revenue for $360,000 LO3 16 No constructive gain or loss arises from the purchase of an affiliate’s bonds if the a affiliate is a 100%-owned subsidiary b bonds are purchased at book value c bonds are purchased with arm’s-length bargaining outside entities d gain or loss cannot be reasonably estimated ©2009 Pearson Education, Inc publishing as Prentice Hall 7-5 from To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO3 17 Constructive gains or losses are allocated between purchasing and issuing affiliates according to a b c d LO3 18 the agency theory the par value theory either the agency theory or the par value theory neither the agency theory nor the par value theory No allocation of gain or loss on the constructive retirement of intercompany bonds will occur a b c d when the subsidiary is the issuing affiliate when the effective interest rate method is applied in the consolidated income statement when the parent company is the issuing affiliate Use the following information in answering questions 19 and 20 Mistletoebird Corporation owns an 80% interest in Berries Company acquired at book value several years ago On January 1, 2006, Berries purchased $100,000 par of Mistletoebird’s outstanding bonds for $103,000 The bonds were issued at par and mature on January 1, 2009 Straight-line amortization is used Separate incomes of Mistletoebird and Berries for 2006 are $350,000 and $120,000, respectively LO4 19 Consolidated net income for 2006 was a b c d LO4 20 $443,600 $444,000 $444,400 $448,000 Minority interest income for 2006 was a b c d $23,000 $23,600 $24,000 $24,400 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-6 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO1 Exercise Separate company and consolidated income statements for Pitta and New Guinea Corporations for the year ended December 31, 2006 are summarized as follows: Pitta Sales Revenue Income from New Guinea Bond interest income Gain on bond retirement Total revenues $ Cost of sales Bond interest expense Other expenses Minority interest income Total expenses Net income $ 500,000 19,900 New Guinea 100,000 $ Consolidated $ 600,000 6,000 519,900 $ 280,000 9,000 120,900 409,900 110,000 3,000 603,000 106,000 $ 50,000 $ 31,000 81,000 25,000 $ $ 330,000 3,600 151,900 7,500 493,000 110,000 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, 2011 On January 1, 2006, a portion of the bonds was purchased and constructively retired Required: Answer the following questions Which company is the issuing affiliate? What is the dollar effect of the constructive retirement on consolidated net income for 2006? What portion of the bonds remains outstanding at December 31, 2006? Is New Guinea a wholly-owned subsidiary? If not, what percentage does Pitta own? Does the purchasing affiliate use straight-line or effective interest amortization? Explain Guinea the calculation of Pitta’s $19,900 income from ©2009 Pearson Education, Inc publishing as Prentice Hall 7-7 New To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO1 Exercise Jacky Winter Corporation owns a 90% interest in Park Company The following information is from the adjusted trial balances at December 31, 2005, at which time the bonds have four years to maturity Jacky Winter acquired Park’s bonds at the beginning of the year The bonds have interest payment dates of January and July Investment in Park Bonds, $200,000 par 10% Bonds payable, $400,000 Bond premium Interest expense Interest receivable Interest income Interest payable Jacky Winter 196,000 Park 400,000 16,000 36,000 10,000 21,000 20,000 Required: Prepare the necessary consolidation working paper entries on December 31, 2006 with respect to the intercompany bonds LO2 Exercise Pheasant Corporation owns 80% of Rural Corporation’s outstanding common stock that was purchased at book value and fair value on January 1, 1999 Additional information: Pheasant sold inventory items that cost $3,000 to Rural during 2006 for $6,000 One-half of this merchandise was inventoried by Rural at year-end At December 31, 2006, Rural owed Pheasant $2,000 on account from the inventory sales No other intercompany sales of inventory have occurred since Pheasant acquired its interest in Rural Pheasant sold a plant asset with a book value of $5,000 and a 5year useful life to Rural for $10,000 on December 31, 2004 This plant asset remains in use by Rural and is depreciated by the straight-line method ©2009 Pearson Education, Inc publishing as Prentice Hall 7-8 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com On January 2, 2006, Rural paid $10,800 for $10,000 par value of Pheasant’s 10-year, 10% bonds These bonds have interest payment dates of January and July 1, and mature on January 1, 2010 Straight-line amortization has been applied by Rural to the Pheasant bond investment Pheasant uses the equity method in accounting for its investment in Rural Required: Complete the working papers to consolidate the financial statements of Pheasant Corporation and Rural for the year ended December 31, 2006 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-9 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Pheasant Corporation and Subsidiary Consolidation Working Papers at December 31, 2006 Eliminations Pheasant Rural Debit Credit INCOME STATEMENT Sales Income from Gain or loss on bonds Interest Income Cost of sales Depreciation Interest expense Net income Retained Earnings 1/1 Add: Net income Dividends Retained Earnings 12/31 BALANCE SHEET Cash Interest Rec Receivables Inventories Equipment-net Investment in Rural stock Investment in Pheasant bonds TOTAL ASSETS LIAB & EQUITY Accounts payable Interest payable Bonds payable Capital stock Retained Earnings 1/1 Noncontrl Interest 12/31 Noncontrl Interest Expense TOTAL LIAB & EQUITY $ 50,000 6,900 Balance Sheet $ 24,000 800 9,000) 5,800) ( 14,000) ( ( 3,900) ( ( 2,000) 37,000 10,000 12,000 8,000 37,000 10,000 ( 6,000) ( 2,000) $ 43,000 $ 16,000 8,000 1,400 500 3,500 3,000 31,000 11,000 5,000 43,000 30,100 $ 97,100 10,600 $ 50,000 3,100 1,000 20,000 30,000 6,000 28,000 43,000 16,000 97,100 $ 50,000 $ ©2009 Pearson Education, Inc publishing as Prentice Hall 7-10 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO2&3 Exercise Thornbill Corporation owns 90% of the outstanding voting common stock of Hangout Corporation On January 1, 1998, Hangout issued $1,000,000 face amount of 12%, $1,000 bonds payable at 119.20 The bonds pay interest on January and July of each year and mature on for on January 1, 2009 On July 1, 2006, Thornbill purchased all of the outstanding bonds at a price of 107.50 Required: Explain the relationship between the balances in the Investment in Hangout Bonds account on Thornbill’s books and the bondrelated accounts, i.e., Bonds Payable and Discount/Premium on Bonds Payable, on Hangout’s books Using your written rationale from Requirement 1, determine the balance in the Investment in Hangout Bonds account on December 31, 2006, October 31, 2007, May 31, 2008 and November 30, 2008, assuming that amortization is recorded monthly LO3&4 Exercise Honeyeater Corporation owns a 60% interest in Waterhole Corporation acquired several years ago at a price equal to book value and fair value On December 31, 2005, Waterhole had $900,000 par of 12% bonds outstanding with an unamortized premium of $30,000 The bonds mature in five years and pay interest on January and July On January 1, 2006, Honeyeater acquired one-third of Waterhole’s bonds for $317,000 Honeyeater and Waterhole use straight-line amortization Waterhole reports net income of $300,000 for 2006 Required: Calculate Honeyeater’s income from Waterhole for 2006 Calculate the minority interest income for 2006 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-15 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO4 Exercise 10 Willy Wagtail Company has $4,000,000 of 12% bonds outstanding on December 31, 2004 with unamortized premium of $120,000 These bonds pay interest semiannually on January and July and mature on January 1, 2010 Straight-line amortization is used Garden Inc., 80%-owned subsidiary of Willy Wagtail, buys $1,000,000 par value of Willy Wagtail’s outstanding bonds in the market for $980,000 There is only one issue of outstanding bonds of the affiliated companies and they have consolidated financial statements For the year 2005, Willy Wagtail has income from its separate operations (excluding investment income) of $4,500,000 and Garden reports net income of $600,000 Required: Determine the following: Noncontrolling interest expense for 2005 Consolidated net income for Willy Wagtail Company and subsidiary for 2005 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-16 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTIONS Multiple Choice Questions c b c d a d b b c b c Book value of Australian Owl’s bonds acquired by Glider equals 1/3 times ($600,000 + $9,000) Less: Cost of acquiring Australian Owl bonds Constructive gain on Australian Owl bonds Consolidated interest expense = $46,200 x 2/3 Australian Owl’s separate income: Income from Glider ($120,000 x 80%) = Less: Loss on constructive retirement of Australian Owl’s bonds Plus: Piecemeal recognition of the constructive loss ($3,000/3 years) = Consolidated net income Because Australian Owl is the issuing entity the gain or loss is not allocated to the noncontrolling interest The noncontrolling interest expense is ($120,000 x 20%) or $ 203,000 $ 198,000 5,000 $ 30,800 $ 350,000 96,000 ( 3,000 ) $ 1,000 444,000 $ 24,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-17 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com c Full interest for 12 months Equals $920,000 x 10% Less: interest on $230,000 for months = $230,000 x 10% x 75% Consolidated interest expense d Book value of Polecat’s bonds x % purchased by Seadog Equals: Book value purchased Purchase price ($970 x 1,600)= Gain on retirement 10 11 12 b c a Total book value acquired = $5,000,000 x 60% Purchase price 3,000 bonds x $1,015 Loss on constructive retirement Book value at January 1, 2007 equals $5,300,000 minus $180,000= Percentage of bonds acquired Equals book value acquired Purchase price 4,000 bonds x $980= Gain on constructive retirement= Book value at January 1, 2008 equals $5,150,000 minus $120,000 Percentage of bonds acquired Equals book value acquired Purchase price 3,500 bonds x $1,040 Loss on constructive retirement 13 b ($5,000,000 - $3,000,000) x 12% = 14 a Bonds payable $5,000,000 minus bonds held by Branch of $3,000,000 $ 92,000 $ 17,250 74,750 $ 4,024,000 $ $ 40% 1,609,600 1,552,000 57,600 $ 3,000,000 3,045,000 $ 45,000 $ 5,120,000 80% 4,096,000 3,920,000 $ 176,000 $ 5,030,000 70% 3,521,000 3,640,000 $ 119,000 $ 240,000 $ 2,000,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-18 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Interest accrued on December 31, 2007 will be the interest on bonds held by non-affiliates or $2,000,000 x 12% x ½ year = 15 b 16 b 17 c 18 d 19 b 20 c Mistletoebird’s separate income: Income from Berries ($120,000 x 80%) = Less: Loss on constructive retirement of Mistletoebird bonds Plus: Piecemeal recognition of the constructive loss ($3,000/3 years) = Consolidated net income Since Mistletoebird is the issuing entity the gain or loss is not allocated to the noncontrolling interest The noncontrolling interest income is ($120,000 x 20%) $ 120,000 $ 350,000 96,000 ( 3,000 ) $ 1,000 444,000 $ 24,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-19 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 1 Pitta is the issuing affiliate Effect on consolidated net income: Gain on constructive retirement of bonds $ Less: Piecemeal recognition of gain ($6,000 interest income - $5,400 interest expense) ( Increase in consolidated net income $ 3,000 600 ) 2,400 Percent of bonds outstanding on December 31, 2006 is 40%, computed as $3,600 consolidated interest expense divided by $9,000 interest expense of Pitta New Guinea is partially owned as evidenced by the minority interest income The ownership percentage is 70% ($7,500 minority interest income divided by $25,000 income of New Guinea = 30% minority interest Straight-line amortization $100,000 par x 60% purchased Purchase price years before maturity Gain Nominal interest ($60,000 x 9%) Discount amortization ($3,000/5 years) Bond interest income $ $ $ 60,000 57,000 3,000 5,400 600 6,000 Pitta’s income from New Guinea Share of New Guinea’s reported income ($25,000 x 70%) = $ Add: Constructive gain Less: Piecemeal recognition of constructive gain ( Income from New Guinea $ 17,500 3,000 600 ) 19,900 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-20 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 2006 12/31 12/31 Debit 10,000 Bond Interest Payable Bond Interest Receivable Credit 10,000 Bonds Payable Interest Revenue Bond premium Interest Expense (50% owned) Investment in Park’s Bonds Gain on bonds 200,000 21,000 8,000 18,000 196,000 15,000 Supporting Computations: Cost of bonds to Jacky Winter 196,000-1,000 amortization Book value acquired 1/1/2005 where 4,000 per year is amortized ($400,000 + $20,000) x 50% = Gain on constructive bond retirement $ 195,000 210,000 $ 15,000 Exercise Pheasant Corporation and Subsidiary Consolidation Working Papers at December 31, 2006 Eliminations Pheasant Rural Debit Credit INCOME STATEMENT Sales $ 50,000 $24,000 Income from 6,900 Loss on bonds Interest Income 800 Cost of sales ( 14,000) ( 9,000) Depreciation ( 3,900) ( 5,800) Interest expense ( 2,000) Minority income Net income 37,000 10,000 Retained Earnings 1/1 12,000 8,000 Add: Net income 37,000 10,000 Dividends ( 6,000) ( 2,000) Retained Earnings 12/31 $ 43,000 $16,000 a e d d b $ 6,000 6,900 800 800 1,500 a c d f 8,000 e Noncontl Consolidated $68,000 ( $ 6,000 1,000 1,000 800) ( 18,500) ( 8,700) ( 1,000) $2,000 ( 2,000) 37,000 1,600 ( ©2009 Pearson Education, Inc publishing as Prentice Hall 7-21 12,000 37,000 400) ( 6,000) $43,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com BALANCE SHEET Cash Interest Rec Receivables Inventories Equipment-net Investment in Rural stock Investment in Pheasant bonds TOTAL ASSETS $ LIAB & EQUITY Accounts payable Interest payable Bonds payable Capital stock Retained Earnings 1/1 Noncontl Interest 12/31 Noncontl Interest Expense TOTAL LIAB & $ EQUITY 8,000 11,000 5,000 43,000 1,400 500 3,500 3,000 31,000 $ 9,400 c 30,100 97,100 h g b c 4,000 e f 500 2,000 1,500 3,000 5,300 28,800 d 10,600 10,600 $50,000 3,100 1,000 20,000 30,000 6,000 28,000 43,000 16,000 12,500 6,500 71,000 $99,400 g h d f 2,000 500 10,000 28,000 7,100 500 10,000 30,000 43,000 f 7,200 7,200 8,800 97,100 $50,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-22 8,800 $99,400 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise Wren Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2006 Eliminations Wren Schrub Debit Credit BALANCE SHEET Cash $ 39,100 Receivables 80,000 Interest Receivable 2,500 Inventories 70,000 Land 50,000 Plant assets-net 160,000 Investment in Schrub bonds 48,400 Investment in Schrub stock 179,160 TOTAL ASSETS $ 629,160 LIAB & EQUITY Accounts payable 47,000 Bond interest payable 10,000 10% Bonds Payable 200,000 Premium on bonds payable Capital stock 280,000 Retained Earnings 92,160 Noncontroling Interest TOTAL LIAB & $ EQUITIES 629,160 Noncntl $30,000 75,000 $69,100 155,000 c 40,000 45,000 120,000 Consolidated b $ 2,500 110,000 95,000 295,000 $ 15,000 a a b 48,400 2,160 177,000 $310,000 $724,100 23,400 70,400 5,000 c 2,500 12,500 100,000 a 50,000 250,000 1,600 120,000 a b 800 120,000 800 280,000 60,000 b 60,000 92,160 a b 248,300 240 18,000 248,300 $310,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-23 18,240 $724,100 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Supporting computations Book value of bonds ($102,000 x 50%) Cost of acquiring $50,000 par Constructive gain Piecemeal recognition of gain Unrecognized at December 31, 2006 Majority share ($2,400 x 90%) Minority share ($2,400 x 10%) $ 51,000 48,000 ) 3,000 600 ) ( ( $ $ Excess allocated to plant assets Depreciation for years ($2,500 x years) Remaining excess $ 2,400 $ 25,000 $ 10,000 ) 15,000 2,160 240 ( Exercise 2006 12/31 12/31 Bond Interest Payable Bond Interest Receivable Premium on Bonds Payable Bonds Payable Interest Revenue Interest Expense Investment in Veranda Bonds Gain on Retirement of Bonds Supporting Computations: Cost of bonds to Sunbird Book value acquired ($3,000,000 + $60,000) x 40% = Gain on constructive bond retirement Debit 72,000 Credit 72,000 18,000 1,200,000 141,600 138,000 1,207,200 14,400 $ 1,209,600 $ 1,224,000 14,400 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-24 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com years remaining Premium on Bond Payable $60,000 x 3/4 x 40% = $18,000 Interest Expense $1,200,000 x 12% = $144,000 Less: $60,000 x 1/4 x 40% = $ 6,000 $138,000 Interest Revenue $144,000 - ($9,600 x 1/4) = $141,600 Exercise Date 2006 Account Name Gibberbird’s books Jul 01 Investment in Rock Bonds Cash Dec 31 Bond Interest Receivable Bond Interest Revenue Investment in Rock Bonds Debit 463,500 463,500 13,500 10,800 2,700 Rock’s books Dec 31 Bond Interest Expense Bond Interest Payable 13,500 Consolidated Working Papers Dec 31 Bond Interest Payable Bond Interest Receivable 13,500 Dec 31 Bonds Payable Loss on Bonds Bond Interest Revenue Bond Interest Expense Investment in Rock Bonds Credit 13,500 13,500 450,000 13,500 10,800 13,500 460,800 Interest Revenue: ($450,000 x 6% x 1/2) - ($13,500 premium/5 periods) = $13,500 - $2,700 = $10,800 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-25 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise Date 2006 Account Name Bellbird’s books Jul 01 Investment in Caterpillar Bonds Cash Dec 31 Bond Interest Receivable Bond Interest Revenue Investment in Caterpillar Bonds Caterpillar’s books Dec 31 Bond Interest Expense Bond Interest Payable Discount on Bonds Payable Consolidated Working Papers Dec 31 Bond Interest Payable Bond Interest Receivable Dec 31 Bonds Payable Loss on Bonds Bond Interest Revenue Bond Interest Expense Discount on Bonds Payable Investment in Caterpilllar Bonds Debit Credit 618,000 618,000 18,000 14,400 3,600 21,600 18,000 3,600 18,000 18,000 600,000 28,800 14,400 20,600 7,200 614,400 (Book value of bonds $589,200 - purchase cost $618,000 = $28,800 loss) ©2009 Pearson Education, Inc publishing as Prentice Hall 7-26 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise Requirement The purpose of the Investment in Hangout Bonds account on the acquirer’s books and the Bonds Payable, Discount on Bonds Payable/Premium on Bonds Payable accounts on the issuer’s books is similar in that each set of accounts is tracking the net book value of the bonds Since we know that at the maturity date the net book value of the books must be equal to the face amount of the bonds being redeemed, then no matter what amounts are initially placed into these accounts, the balance on the maturity date is equal to the maturity value of the bonds Therefore, both sets of accounts are moving toward the same final number In this problem, the original premium on the bonds is a total of $192,000 which is $192 per bond Since the bonds have an eight-year or 96-month term, the rate of amortization is $2 per month per bond or $2,000 per month in total When Thornbill acquires the bonds it pays a premium of $75,000 which, when amortized over the 30-month remaining life of the bond will produce an amortization rate of $2.50 per month per bond or $2,500 per month in total When these different rates of amortization are applied to the Premium on Bonds Payable on Hangout’s books and the Investment in Hangout Bonds account on Thornbill’s books, the account balances converge toward the face amount of the bonds Requirement Amortization date Dec Oct May Nov 31, 31, 31, 30, 2006 2007 2008 2008 Months since acquisition 16 23 29 months months months months Cumulative amortization $15,000 $40,000 $57,500 $72,500 The $75,000 premium on the bonds as acquired by Thornbill will be amortized at a rate of $2,500 per month ($75,000 premium/30 months to maturity) The balance in the Investment in Hangout Bonds account will be the original balance of $1,075,000 minus the cumulative amortization amounts shown above or: Dec Oct May Nov 31, 31, 31, 30, 2006 2007 2008 2008 $1,060,000 $1,035,000 $1,017,500 $1,002,500 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-27 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise Preliminary computations: Book value of bonds $930,000 x 1/3 = Cost of bonds Loss on constructive retirement Requirement 1: Income from Waterhole: Share of Waterhole’s income ($300,000 x 60%) Less: Constructive loss ($7,000 x 60%) Plus: Piecemeal recognition of loss ($7,000/5 years) x 60% Income from Waterhole Requirement 2: Minority interest income: Waterhole’s reported income Less: Constructive loss on bonds Plus: Piecemeal recognition of loss Equals: Adjusted reported income Minority percentage Minority interest income $ 310,000 317,000 7,000 $ $ ( $ $ ( $ $ 180,000 4,200 ) 840 176,640 300,000 7,000 ) 1,400 294,400 40% 117,760 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-28 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 10 Requirement Minority interest income $600,000 x 20% Requirement Consolidated net income: Income from Willy Wagtail’s operations Income from Garden: Willy Wagtail’s share of Garden income = 80% x $600,000 Add: Constructive gain on bond retirement ($4,000,000 + $120,000)*25%980,000 Less: Piecemeal recognition of gain = $50,000/8 years ( $ 120,000 $ 4,500,000 $ 480,000 50,000 12,500 ) 517,500 Less: Noncontrolling interest expense 20% x $600,000 = Consolidated net income ( $ 120,000 ) 4,897,500 ©2009 Pearson Education, Inc publishing as Prentice Hall 7-29 ... remains in use by Rural and is depreciated by the straight-line method ©2009 Pearson Education, Inc publishing as Prentice Hall 7-8 To download more slides, ebook, solutions and test bank, visit... more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Interest accrued on December 31, 2 007 will be the interest on bonds held by non-affiliates or $2,000,000 x... ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTIONS Multiple Choice Questions c b c d a d b b c b c Book value of Australian Owl’s bonds acquired by Glider equals 1/3