Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
42. On January 1, 20X4, Parent Company purchased 90% of the common stock of Subsidiary Company for
$360,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $20,000,
$130,000, and $200,000, respectively. Any excess of cost over book value is due to goodwill. Parent accounts
for the Investment in Subsidiary using the simple equity method.
On January 1, 20X4, Subsidiary sold $100,000 par value of 6%, ten-year bonds for $97,000. The bonds pay
interest semi-annually on January 1 and July 1 of each year.
On January 1, 20X5, Parent repurchased all of Subsidiary's bonds for $96,400. The bonds are still held on
December 31, 20X5.
Both companies have correctly recorded all entries relative to bonds and interest, using straight-line
amortization for premium or discount.
Required:
Prepare the eliminating entries pertaining to the intercompany purchase of bonds for the year ended December
31, 20X5.
Eliminations and Adjustments:
43. On January 1, 20X4, Parent Company purchased 90% of the common stock of Subsidiary Company for
$360,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $20,000,
$130,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent account for
the Investment in Subsidiary using the simple equity method.
On July 1, 20X4, Subsidiary sold $100,000 par value of 9%, ten-year bonds for $106,755, which resulted in an
effective interest rate of 8%. The bonds pay interest semi-annually on January 1 and July 1 of each year.
Subsidiary uses the effective-interest method of amortizing the premium.
An amortization table for 20X4 and 20X5 is presented below:
Date
Cash Int
Interest Exp
Premium Amort
Premium Bal
Carrying Value
7/1/X4
6,755
106,755
12/31/X4
4,500
4,270
230
6,525
106,525
7/1/X5
4,500
4,261
239
6,286
106,286
12/31/X5
4,500
4,251
249
6,037
106,037
On July 1, 20X5, Parent repurchased all of Par's bonds for $94,153, which resulted in an effective interest rate of 10%. The bonds are still held at
year end.
Both companies have correctly recorded all entries relative to bonds and interest. The balance in the Investment in Subsidiary Bonds account is
$94,361 at December 31, 20X5, and the parent recognized interest income of $4,708 during the period.
Required:
Prepare the eliminating entries pertaining to the intercompany purchase of bonds for the year ending December 31, 20X5.
Eliminations and Adjustments:
44. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$402,000. On this date Subsidiary had total owners' equity of $440,000. Any excess of cost over book value is
due to goodwill. Parent accounts for its investment in Subsidiary using the simple equity method.
On January 1, 20X3, Parent held merchandise acquired from Subsidiary for $50,000. During 20X3, Subsidiary
sold merchandise to Parent for $120,000, of which Parent holds $30,000 on December 31, 20X3. Subsidiary's
gross profit on sales is 40%. On December 31, 20X3, Parent still owes Subsidiary $5,000 for merchandise.
On December 31, 20X1, Parent sold $100,000 par value of 11%, 10-year bonds for $106,232, which resulted in
an effective interest rate of 10%. The bonds pay interest semi-annually on June 30 and December 31. Parent
uses the effective-interest method of amortization for the premium.
An amortization table for 20X2 and 20X3 is presented below:
Cash
Interest
Interest Expense
Premium
Amortization
Premium Balance
Debt Carrying Value
12/31/X1
6,232
106,232
6/30/X2
5,500
5,312
(188)
6,044
106,044
12/31/X2
5,500
5,302
(198)
5,846
105,846
6/30/X3
5,500
5,292
(208)
5,638
105,638
12/31/X3
5,500
5,282
(218)
5,420
105,420
On December 31, 20X2, Subsidiary repurchased $50,000 par value of the bonds, paying a price equal to par. The bonds are still held on December
31, 20X3.
On December 31, 20X3, Parent sold equipment with a cost of $50,000 and accumulated depreciation of $30,000 to Subsidiary for $40,000.
Subsidiary will use the equipment beginning in 20X4.
Required:
Complete the Figure 5-7 worksheet for consolidated financial statements for the year ended December 31, 20X3. Round all computations to the
nearest dollar.
Figure 5-7
Trial Balance
Eliminations and
Parent
Sub.
Adjustment
s
Account Titles
Company
Company
Debit
Credit
Inventory, December 31
120,000
60,000
Other Current Assets
399,620
325,000
Investment in Sub. Company
550,000
Investment in Parent Bonds
50,000
Land
140,000
100,000
Buildings and Equipment
325,000
440,000
Accumulated Depreciation
(120,000)
(130,000)
Goodwill
Current Liabilities
(160,000)
(80,000)
Bonds Payable, 10%
(100,000)
Premium on Bonds Payable
(5,420)
Other Long-Term Liabilities
(200,000)
(140,000)
Common Stock – P Co.
(200,000)
Other Paid-in Capital – P Co.
(100,000)
Retained Earnings – P Co.
(489,200)
Common Stock – S Co.
(100,000)
Other Paid-in Capital – S Co.
(200,000)
Retained Earnings – S Co.
(250,000)
Net Sales
(590,000)
(520,000)
Cost of Goods Sold
355,000
310,000
Operating Expenses
114,426
115,500
Interest Income
(5,500)
Interest Expense
10,574
Subsidiary Income
(80,000)
Gain on Sale of Equipment
(20,000)
Dividends Declared – P Co.
50,000
Dividends Declared – S Co.
25,000
Consolidated Net Income
To NCI
To Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0
0
(continued)
Consol.
Control.
Consol.
Income
Retained
Balance
Account Titles
Statement
NCI
Earnings
Sheet
Inventory, December 31
Other Current Assets
Investment in Sub. Company
Investment in Parent Bonds
Land
Buildings and Equipment
Accumulated Depreciation
Goodwill
Current Liabilities
Bonds Payable, 10%
Premium on Bonds Payable
Other Long-Term Liabilities
Common Stock – P Co.
Other Paid-in Capital – P Co.
Retained Earnings – P Co.
Common Stock – S Co.
Other Paid-in Capital – S Co.
Retained Earnings – S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Interest Income
Interest Expense
Subsidiary Income
Gain on Sale of Equipment
Dividends Declared – P Co.
Dividends Declared – S Co.
Consolidated Net Income
To NCI
To Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
For the worksheet solution, please refer to Answer 5-7.
45. Smart Corporation is a 90%-owned subsidiary of Phan Inc. On January 2, 20X1, Smart agreed to lease
$400,000 of construction equipment from Phan for $3,000 a month on an operating lease. The equipment has a
10-year life and is being depreciated using the straight-line method.
Required:
Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-8 partial
worksheet for December 31, 20X3. Key and explain all eliminations and adjustments.
Figure 5-8
Phan Inc. and Smart Corp.
Consolidated Partial Worksheet
For the Year Ended December 31, 20X3
Elimination
s and
Trial Balance
Adjustments
Phan
Smart
Debit
Debit
Credit
Equipment
987,000
40,000
Accumulated Depreciation - Equipment
(212,500)
(8,000)
Equipment Under Operating Lease
400,000
Accumulated Depreciation - Equipment
Under Operating Lease
(120,000)
Rent Receivable
3,000
Rent Payable
(3,000)
Rental Income
(50,000)
Rent Expense
36,000
Depreciation Expense
138,700
2,000
For the worksheet solution, please refer to Answer 5-8.
46. Tempo Industries is an 80%-owned subsidiary of Dalie Inc. On January 1, 20X2, Dalie leased an asset to
Tempo and the following journal entries were made:
Tempo
Assets Under Capital Lease
21,561
Cash
5,000
Obligations Under Capital Lease
16,561
Dalie
Minimum Lease Payments Receivable
20,000
Cash
5,000
Unearned Interest Income
3,439
Asset (cost of asset leased)
18,000
Sales Profit on Leases
3,561
The terms of the lease agreement require Tempo to make five payments of $5,000 each at the beginning of each year. The implicit interest rate used
by both Dalie and Tempo is 8%.
Required:
Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-9 partial worksheet of December 31, 20X2. Key and
explain all eliminations and adjustments.
Figure 5-9
Dalie and Tempo Industries
Consolidated Partial Worksheet
For the Year Ended December 31, 20X2
Elimination
s and
Trial Balance
Adjustments
Account Titles
Dalie
Tempo
Debit
Credit
Minimum Lease Payments Receivable
20,000
Unearned Interest Income
(2,114)
Assets Under Capital Lease
21,561
Accumulated Depreciation - Assets Under
Capital Lease
(4,312)
Plant Assets
410,000
260,000
Accumulated Depreciation - Plant Assets
(167,000)
(98,000)
Obligations Under Capital lease
(16,561)
Interest Payable
(1,325)
Interest Income
(1,325)
Sales Profit on Leases
(3,561)
Interest Expense
1,325
Depreciation Expense
17,500
10,470
For the worksheet solution, please refer to Answer 5-9.
