1、-. z.Advanced Accounting, 11e (Beams/Anthony/Bettinghaus/Smith)Chapter 7 Interpany Profit Transactions - BondsMultiple Choice Questions1) If the price paid by a parent pany to acquire the debt of a subsidiary is greater than the book value of the liability, a _ occurs.A) realized loss on the retirem

2、ent of debt from the viewpoint of the subsidiaryB) realized gain on the retirement of debt from the viewpoint of the subsidiaryC) constructive loss on the retirement of debt from the viewpoint of the consolidated entityD) constructive gain on the retirement of debt from the viewpoint of the consolid

3、ated entityAnswer: CObjective: LO1Difficulty: Easy2) If an affiliate purchases bonds in the open market, the book value of the interpany bond liability at the time of purchase isA) always assigned to the parent pany because it has control.B) the par value of the bonds less the unamortized discount o

4、r plus the unamortized premium.C) par value.D) the par value of the bonds plus the unamortized discount or less the unamortized premium.Answer: BObjective: LO1Difficulty: Easy3) Bonds issued by a pany remain on their books as a liability, but are considered constructively retired whenA) the pany bor

5、rows money from unaffiliated entities to re-purchase its own bonds at a gain.B) The pany borrows money from an affiliate to re-purchase its own bonds at a gain.C) The panys parent or subsidiary purchases the bonds from outside entities.D) The pany borrows money from an affiliate to repurchase its ow

6、n bonds at a gain or at a loss.Answer: CObjective: LO1Difficulty: EasyUse the following information to answer the question(s) below.Pascalian pany owns a 90% interest in Sapp pany. On January 1, 2010, Pascalian had $300,000, 6% bonds outstanding with an unamortized premium of $9,000. The bonds matur

7、e on December 31, 2014. Sapp acquired one-third of Pascalians bonds in the open market for $97,000 on January 1, 2010. Both panies use straight-line amortization of bond discounts/premiums. Interest is paid on December 31. On December 31, 2010, the books of the two affiliates held the following bala

8、nces:Pascalians books6% bonds payable$300,000Premium on bonds7,200Interest e*pense16,200Sapps booksInvestment in Pascalian bonds$ 97,600Interest ine6,6004) The gain from the bond purchase that appeared on the December 31, 2010 consolidated ine statement wasA) $4,320.B) $4,800.C) $5,400.D) $6,000.Ans

9、wer: DE*planation: D) Book value of Pascalians bonds acquired by Sapp equals 1/3times ($300,000 + $9,000)$103,000Less: Cost of acquiring Pascalian bonds( 97,000)Constructive gain on bonds$ 6,000Objective: LO2Difficulty: Moderate5) Consolidated Interest E*pense and consolidated Interest Ine, respecti

10、vely, that appeared on the consolidated ine statement for the year ended December 31, 2010 wasA) $10,800 and $0.B) $10,800 and $6,600.C) $0 and $0.D) $16,200 and $6,600.Answer: AE*planation: A) Consolidated interest e*pense =$16,200 2/3$10,800Objective: LO2Difficulty: Moderate6) Prussia Corporation

11、owns 80% the voting stock of Stad Corporation. On January 1, 2010, Prussia paid $391,000 cash for $400,000 par of Stads 10% $1,000,000 par value outstanding bonds, due on April 1, 2015. Stads bonds had a book value of $1,045,000 on January 1, 2010. Straight-line amortization is used. The gain or los

12、s on the constructive retirement of $400,000 of Stad bonds on January 1, 2010 was reported in the 2010 consolidated ine statement in the amount ofA) $14,000.B) $21,600.C) $23,000.D) $27,000.Answer: DObjective: LO2Difficulty: ModerateUse the following information to answer the question(s) below.Pfadt

13、 Inc. had $600,000 par of 8% bonds payable outstanding on January 1, 2011 due January 1, 2015 with an unamortized discount of $12,000. Senat is a 90%-owned subsidiary of Pfadt. On January 2, 2011, Senat Corporation purchased $150,000 par value of Pfadts outstanding bonds for $152,000. The bonds have

14、 interest payment dates of January 1 and July 1. Straight-line amortization is used.7) With respect to the bond purchase, the consolidated ine statement of Pfadt Corporation and Subsidiary for 2011 showed a gain or loss ofA) $ 4,500.B) $ 5,000.C) $10,800.D) $12,000.Answer: BE*planation: B) ($588,000

15、 0.25) -$152,000Objective: LO2Difficulty: Moderate8) Bond Interest Receivable for 2011 of Pfadts bonds on Senats books wasA) $5,400.B) $6,000.C) $10,800.D) $12,000.Answer: BE*planation: B) $150,000 8% 1/2Objective: LO2Difficulty: Moderate9) Bonds Payable appeared in the December 31, 2011 consolidate

16、d balance sheet of Pfadt Corporation and Subsidiary in the amount ofA) $398,925.B) $441,000.C) $443,250.D) $450,000.Answer: CE*planation: C) $591,000 75%Objective: LO2Difficulty: ModerateUse the following information to answer the question(s) below.Plenty Corporation issued si* thousand, $1,000 par,

17、 6% bonds on January 1, 2010, at par. Interest is paid on January 1 and July 1 of each year; the bonds mature on January 1, 2015. On January 2, 2012, Scrawn Corporation, a 75%-owned subsidiary of Plenty, purchased 3,000 of the bonds on the open market at 102.50. Plentys separate net ine for 2012 inc

18、luded the annual interest e*pense for all 3,000 bonds. Scrawns separate net ine for 2012 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 panies use straight-line amortization of bond discounts/premiums.10)

19、What was the amount of gain or (loss) from the interpany purchase of Plentys bonds on January 2, 2012A) $(56,250)B) $(75,000)C) $ 75,000D) $ 56,250Answer: BE*planation: B) Total book value acquired =$6,000,000 50% $3,000,000Purchase price 3,000 $1,025 3,075,000Loss on constructive retirement$ 75,000

20、Objective: LO2Difficulty: Moderate11) If the bonds were originally issued at 106, and 80% of them were purchased by Scrawn on January 2, 2013 at 98, the gain or (loss) from the interpany purchase wasA) $(384,000).B) $(211,200).C) $ 211,200.D) $ 384,000.Answer: CE*planation: C) Book value at January

21、2, 2013 equals $6,360,000 minus $216,000=$6,144,000Percentage of bonds acquired 80%Equals book value acquired4,915,200Purchase price 4,800 bonds $980= 4,704,000Gain on constructive retirement=$ 211,200Objective: LO2Difficulty: Moderate12) If the bonds were originally issued at 103, and 70% of them w

22、ere purchased on January 2, 2014 at 104, the constructive gain or (loss) on the purchase wasA) $(142,800).B) $( 42,000).C) $ 42,000.D) $ 142,800.Answer: AE*planation: A) Book value at January 2, 2014 equals $6,180,000 minus $144,000 $6,036,000Percentage of bonds acquired 70%Equals book value acquire

23、d 4,225,200Purchase price 4,200 bonds $1,040 4,368,000Loss on constructive retirement $ 142,800Objective: LO2Difficulty: Moderate13) Using the original information, the amount of consolidated Interest E*pense for 2012 wasA) $ 135,000.B) $ 180,000.C) $ 270,000.D) $ 360,000.Answer: BE*planation: B) ($

24、6,000,000 - $3,000,000) 6%Objective: LO2Difficulty: Moderate14) Using the original information, the balances for the Bonds Payable and Bond Interest Payable accounts, respectively, on the consolidated balance sheet for December 31, 2013 wereA) $3,000,000 and $ 90,000.B) $3,000,000 and $180,000.C) $6

25、,000,000 and $ 90,000.D) $6,000,000 and $180,000.Answer: AE*planation: A) Bonds payable $6,000,000 minus bonds held by Scrawn of $3,000,000. Interest accrued on December 31, 2013 will be the interest on bonds held by non-affiliates or $3,000,000 6% 1/2 yearObjective: LO2, 3Difficulty: Moderate15) Us

26、ing the original information, the elimination entries on the consolidation working papers prepared on December 31, 2012 included at leastA) debit to Bond Interest E*pense for $360,000.B) credit to Bond Interest E*pense for $180,000 and a debit to Bond Interest Payable for $90,000.C) credit to Bond I

27、nterest Receivable for $180,000.D) debit to Bond Interest Revenue for $360,000.Answer: BObjective: LO2Difficulty: Moderate16) No constructive gain or loss arises from the purchase of an affiliates bonds if theA) affiliate is a 100%-owned subsidiary.B) bonds are purchased at book value.C) bonds are p

28、urchased with arms-length bargaining from outside entities.D) gain or loss cannot be reasonably estimated.Answer: BObjective: LO1Difficulty: Easy17) There are several theories for allocating constructive gains or losses between purchasing and issuing affiliates. The Agency TheoryA) does so based on

29、the par value of the bonds purchased.B) assigns the entire constructive gain or loss to the parent based on their control of the decision to purchase the bonds.C) assigns the entire constructive gain or loss to the subsidiary based on the need to have the noncontrolling interest share in the retirem

30、ent of the debt.D) assigns the entire constructive gain or loss to whichever pany issued the bonds.Answer: DObjective: LO1Difficulty: Easy18) Pickle Incorporated acquired a $10,000 bond originally issued by its 80%-owned subsidiary on January 2, 2011. The bond was issued in a prior year for $11,250,

31、 matures January 1, 2016, and pays 9% interest at December 31. The bonds book value at January 2, 2011 is $10,625, and Pickle paid $9,500 to purchase it. Straight-line amortization is used by both panies. How much interest ine should be eliminated in 2011A) $720B) $800C) $900D) $1,000Answer: DE*plan

32、ation: D) $9,500 - $10,000 = discount to amortize as interest e*pense over 5 years, or $100 per year + $900 paid by issuer.Objective: LO2, 3Difficulty: ModerateUse the following information to answer the question(s) below.Poe Corporation owns an 80% interest in Seri pany acquired at book value sever

33、al years ago. On January 2, 2011, Seri purchased $100,000 par of Poes outstanding 10% bonds for $103,000. The bonds were issued at par and mature on January 1, 2014. Straight-line amortization is used. Separate ines of Poe and Seri for 2011 are $350,000 and $120,000, respectively. Poe uses the equit

34、y method to account for the investment in Seri.19) Controlling interest share of consolidated net ine for 2011 wasA) $443,600.B) $444,000.C) $444,400.D) $448,000.Answer: BE*planation: B) Poes separate ine$ 350,000 Ine from Seri ($120,000 80%) 96,000 Less: Loss on constructive retirement of Poe bonds

35、(3,000)Plus: Piecemeal recognition of the constructive loss ($3,000/3 years) 1,000 Controlling interest share$ 444,000 Objective: LO4Difficulty: Moderate20) Noncontrolling interest share for 2011 wasA) $23,000.B) $23,600.C) $24,000.D) $24,400.Answer: CE*planation: C) Since Poe is the issuing entity,

36、 the gain or loss is not allocated to the noncontrolling interest. The noncontrolling interest share is ($120,000 20%) = $24,000.Objective: LO4Difficulty: ModerateE*ercises1) Separate pany and consolidated ine statements for Pitta and Sojourn Corporations for the year ended December 31, 2011 are sum

37、marized as follows: Pitta Soujourn Consolidated Sales Revenue$ 500,000$ 100,000$ 600,000Ine from Sojourn19,900Bond interest ine6,000Gain on bond retirement3,000Total revenues519,900106,000603,000Cost of sales$ 280,000$ 50,000$ 330,000Bond interest e*pense9,0003,600Other e*penses 120,900 31,000 151,9

38、00Total e*penses 409,900 81,000 485,500Consolidated net ine 117,500Noncontrolling interest share 7,500 Separate net ine andControl. interest share in consolidated net ine$ 110,000 $ 25,000$ 110,000The interest ine and e*pense eliminations relate to a $100,000, 9% bond issue that was issued at par va

39、lue and matures on January 1, 2016. On January 2, 2011, a portion of the bonds was purchased and constructively retired.Required: Answer the following questions.1.Which pany is the issuing affiliate of the bonds payable2.What is the gain or loss from the constructive retirement of the bonds payable

40、that is reported on the consolidated ine statement for 20113.What portion of the bonds payable is held by nonaffiliates at December 31, 20114.Is Sojourn a wholly-owned subsidiary If not, what percentage does Pitta own5.Does the purchasing affiliate use straight-line or effective interest amortizatio

41、n6.E*plain the calculation of Pittas $19,900 ine from Sojourn.Answer: 1.Pitta is the issuing affiliate.2.Effect on consolidated net ine:Gain on constructive retirement of bonds$ 3,0003.Percent of bonds held by nonaffiliates at December 31, 2011 is 40%, puted as $3,600 consolidated interest e*pense d

42、ivided by $9,000 interest e*pense of Pitta.4.Sojourn is partially owned as evidenced by the noncontrolling interest share. The ownership percentage is 70% ($7,500 noncontrolling interest share divided by $25,000 ine of Sojourn = 30% noncontrolling interest.)5.Straight-line amortization$100,000 par 6

43、0% purchased$60,000Purchase price 5 years before maturity 57,000Gain 3,000Nominal interest ($60,000 9%)$ 5,400Discount amortization ($3,000/5 years) 600Bond interest ine $ 6,0006.Pittas ine from SojournShare of Sojourns reported ine($25,000 70%) =$17,500Add: Constructive gain3,000Less: Piecemeal rec

44、ognition of constructive gain (600) Ine from Sojourn$19,900Objective: LO1, 2, 4Difficulty: Moderate2) Platts Incorporated purchased 80% of Scarab pany several years ago when the fair value equaled the book value. On January 1, 2010, Scarab has $100,000 of 8% bonds that were issued at face value and

45、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, 2011, Platts purchased all of Scarabs bonds for $96,000.Required:1.Prepare

46、 the journal entries in 2011 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, 2011.Answer: Requirement 1:Platts entries:1/1/11Investment in bonds$96,000Cash$96,00012/31/11Cash8,

47、000Interest ine 8,000Investment in bonds1,000Interest ine 1,000Scarab entries:12/31/11Interest e*pense 8,000Cash 8,000Requirement 2:Consolidating entries:12/31/11Bonds payable100,000Investment in bonds97,000Gain on retirement of debt3,000Interest ine9,000Interest e*pense8,000Gain on retirement of de

48、bt1,000Objective: LO2, 3Difficulty: Moderate3) Paka Corporation owns an 80% interest in Sandra pany. Paka acquired Sandras bonds on January 2, 2011. The following information is from the adjusted trial balances at December 31, 2011, at which time the bonds have three years to maturity. The bonds hav

49、e interest payment dates of January 1 and July 1. Straight-line amortization is used by both panies. Paka Sandra Investment in Sandra Bonds, $100,000 par98,5007% Bonds payable, $200,000200,000Bond premium6,000Interest e*pense12,000Interest receivable7,000Interest ine7,500Interest payable7,000Require

50、d:Prepare the necessary consolidation working paper entries on December 31, 2011 with respect to the interpany bonds.Answer: 2011 Debit Credit 12/31Bond Interest Payable7,000Bond Interest Receivable7,00012/31Bonds Payable100,000Interest Ine7,500Bond premium3,000Interest E*pense (50% owned)6,000Inves

51、tment in Sandras Bonds98,500Gain on retirement of bonds6,000Supporting putations:Cost of bonds to Paka ($98,500 - $500)$98,000Book value acquired 1/1/2011 where $2,000 per year is amortized($200,000 + $8,000) 50% =104,000Gain on constructive bond retirement$6,000Objective: LO2, 3Difficulty: Moderate

52、4) Pheasant Corporation owns 80% of Sal Corporations outstanding mon stock that was purchased at book value equal to fair value on January 1, 2005.Additional information:1.Pheasant sold inventory items that cost $3,000 to Sal during 2012 for $6,000. One-half of this merchandise was inventoried by Sa

53、l at year-end. At December 31, 2012, Sal owed Pheasant $2,000 on account from the inventory sales. No other interpany 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 Dece

54、mber 31, 2010. 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, 2012, Sal paid $10,800 for $10,000 par value of Pheasants 10-year, 10% bonds. These bonds were originally sold at par value, and have interest payment

55、 dates of January 1 and July 1, and mature on January 1, 2016. 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:plete the working papers to consolidate the financial statements of Phe

56、asant Corporation and Sal for the year ended December 31, 2012.Answer: Objective: LO2, 3Difficulty: Difficult5) Phauna paid $120,000 for its 80% interest in Schrub on January 1, 2009 when Schrub had $150,000 of total stockholders equity.On January 1, 2012, Phauna purchased $50,000 of Schrub Corporat

57、ions 8% bonds for $48,000. At that time, $100,000 of bonds had been issued by Schrub, and unamortized premium was $2,000. The bonds pay interest on June 30 and December 31 and mature on December 31, 2016. Both Phauna and Schrub use straight-line amortization. Phauna uses the equity method of account

58、ing for its investment in Schrub.Required:Prepare eliminating/adjusting entries for the bonds on the consolidating work papers for the year ended December 31, 2012.Answer: 12/31/2012Interest ine (8% $50,000) + ($2,000/5) 4,400Interest e*pense(8% $50,000) - ($1,000/5) 3,800Gain on retirement of bonds

59、600Bonds payable50,000Premium on bonds payable800Bond investment48,400Gain on retirement of bonds2,400Premium on bonds payable:$1,000 - $1,000/5 =$800Bond investment:$48,000 + $2,000/5 = $48,400Supporting putations:Book value of bonds($102,000 50%)$51,000 Cost of acquiring $50,000 par (48,000)Constr

60、uctive gain3,000 Piecemeal recognition of gain (600)Unrecognized at December 31, 2012$ 2,400Objective: LO2, 3Difficulty: Difficult6) Pelami Corporation owns a 90% interest in Sunbird Corporation. At December 31, 2010, Sunbird had $3,000,000 of par value 6% bonds outstanding with an unamortized premi