47. On January 1, 20X1 Parent Company acquired 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 $50,000,
$100,000, 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, 20X2, Parent purchased equipment for $204,110 and immediately leased the equipment to
Subsidiary on a 4-year lease. The minimum lease payments of $60,000 are to be made annually on January 1,
beginning immediately, for a total of 4 payments. The implicit interest rate is 12%. The lease provides for an
automatic transfer of title at the end of 4 years. The estimated useful life of the equipment is 6 years. The lease
has been capitalized by both companies. The lease amortization schedule is presented below:
Date
Payment
Interest on
previous balance
Gross Receivable
Unearned
Interest
Carrying Value
1/1/X2
240,000
(35,890)
204,110
1/1/X2
60,000
180,000
(35,890)
144,110
1/1/X3
60,000
17,293
120,000
(18,597)
101,403
1/1/X4
60,000
12,168
60,000
(6,429)
53,571
1/1/X5
60,000
6,429
0
0
0
Required:
Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-10 partial worksheet as of December 31, 20X2. Key and
explain all eliminations and adjustments.
Figure 5-10
Trial Balance
Parent
Adjustment
s
Account Titles
Company
Debit
Credit
Min. Lease Payments Rec.
180,000
Unearned Interest Income
(18,597)
Buildings and Equipment
350,000
Accumulated Depreciation
(100,000)
Equipment under Cap. Lease
Acc. Depr. – Eq. Cap. Lease
Obligation under Cap. Lease
Interest Payable on Lease
Interest Income on Lease
(17,293)
Interest Expense on Lease
(continued)
Consol.
Control.
Consol.
Income
Retained
Balance
Account Titles
Statement
NCI
Earnings
Sheet
Min. Lease Payments Rec.
Unearned Interest Income
Buildings and Equipment
Acc. Depr. – Bldg & Equip
Equipment under Cap. Lease
Acc. Depr. – Eq. Cap. Lease
Obligation under Cap. Lease
Interest Payable on Lease
Interest Income on Lease
Interest Expense on Lease
For the partial worksheet solution, please refer to Answer 5-10.
48. On January 1, 20X1, Parent Company acquired 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 $50,000,
$100,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent uses the
simple equity method to account for its investment in subsidiary.
On January 1, 20X2, Parent purchased equipment for $204,110 and immediately leased the equipment to
Subsidiary on a 4-year lease. The minimum lease payments of $60,000 are to be made annually on January 1,
beginning immediately, for a total of 4 payments. The implicit interest rate is 12%. The lease provides for an
automatic transfer of title at the end of 4 years. The estimated useful life of the equipment is 6 years. The lease
has been capitalized by both companies. A lease amortization schedule, applicable to either company, is
presented below:
Date
Payment
Interest on previous
balance
Gross Receivable
Unearned Interest
Carrying Value
1/1/X2
240,000
(35,890)
204,110
1/1/X2
60,000
180,000
(35,890)
144,110
1/1/X3
60,000
17,293
120,000
(18,597)
101,403
1/1/X4
60,000
12,168
60,000
(6,429)
53,571
1/1/X5
60,000
6,429
0
0
0
Required:
Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-11 partial worksheet as of December 31, 20X3. Key
and explain all eliminations and adjustments.
Figure 5-11
Trial Balance
Parent
Adjustment
s
Account Titles
Company
Debit
Credit
Min. Lease Payments Rec.
120,000
Unearned Interest Income
(6,429)
Buildings and Equipment
350,000
Accumulated Depreciation
(120,000)
Equipment under Cap. Lease
Acc. Depr. – Eq. Cap. Lease
Obligation under Cap. Lease
Interest Payable on Lease
Interest Income on Lease
(12,168)
Interest Expense on Lease
(continued)
Consol.
Control.
Consol.
Income
Retained
Balance
Account Titles
Statement
NCI
Earnings
Sheet
Min. Lease Payments Rec.
Unearned Interest Income
Buildings and Equipment
Accumulated Depreciation
Equipment under Cap. Lease
Acc. Depr. – Eq. Cap. Lease
Obligation under Cap. Lease
Interest Payable on Lease
Interest Income on Lease
Interest Expense on Lease
49. On January 1, 20X1, Parent Company purchased 100% of the common stock of Subsidiary Company for
$390,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $50,000,
$100,000, 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, 20X2, Parent purchased equipment for $204,120 and immediately leased the equipment to
Subsidiary on a 4-year lease. The minimum lease payments of $60,000 are to be made annually on January 1,
beginning immediately, for a total of 4 payments. The implicit interest rate is 12%. The lease provides for an
automatic transfer of title at the end of 4 years. The estimated useful life of the equipment is 6 years. The lease
has been capitalized by both companies.
A lease amortization schedule, applicable to either company, is presented below:
Carrying
Carrying
Interest
Principal
Value on
Value
Rate
Interest
Payment
Reduction
1-1-X2
$204,120
– 60,000
1-1-X2
144,120
12%
$17,294
$60,000
$42,706
– 42,706
1-1-X3
101,414
12%
12,170
60,000
47,830
– 47,830
1-1-X4
53,584
12%
6,416*
60,000
53,584
– 53,584
1-1-X5
$ 0
*Adjusted for
rounding error.
On January 1, 20X3, Parent held merchandise acquired from Subsidiary for $10,000. During 20X3, subsidiary sold merchandise to Parent for
$50,000, of which $15,000 is held by Parent on December 31, 20X3. Subsidiary’s usual gross profit on affiliated sales is 40%.
Required:
Complete the Figure 5-12 worksheet for consolidated financial statements for the year ended December 31, 20X3. Round all computations to the
nearest dollar.
Figure 5-12
Trial Balance
Parent
Adjustment
s
Account Titles
Company
Debit
Credit
Current Assets
234,196
Min. Lease Payments Rec.
120,000
Unearned Interest Income
(6,416)
Investment in Sub. Company
560,000
Land
100,000
Buildings and Equipment
350,000
Accumulated Depreciation
(120,000)
Equipment under Cap. Lease
Acc. Depr. – Eq. Cap. Lease
Goodwill
Current Liabilities
(135,000)
Obligation under Cap. Lease
Interest Payable on Lease
Other Long-Term Liabilities
(200,000)
Common Stock – P Co.
(200,000)
Other Paid-in Capital – P Co.
(100,000)
Retained Earnings – P Co.
(482,780)
Common Stock – S Co.
Other Paid-in Capital – S Co.
Retained Earnings – S Co.
Net Sales
(600,000)
Cost of Goods Sold
372,170
Operating & Other Expenses
140,000
Interest Income on Lease
(12,170)
Interest Expense on Lease
Subsidiary Income
(70,000)
Dividends Declared – P Co.
50,000
Dividends Declared – S Co.
Consolidated Net Income
To NCI
To Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0
(continued)
Consol.
Control.
Consol.
Income
Retained
Balance
Account Titles
Statement
NCI
Earnings
Sheet
Current Assets
Min. Lease Payments Rec.
Unearned Interest Income
Investment in Sub. Company
Land
Buildings and Equipment
Accumulated Depreciation
Equipment under Cap. Lease
Acc. Depr. – Eq. Cap. Lease
Goodwill
Current Liabilities
Obligation under Cap. Lease
Interest Payable on Lease
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 & Other Expenses
Interest Income on Lease
Interest Expense on Lease
Subsidiary Income
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 5-12.
50. On January 1, 20X1, Parent Company acquired 100% of the common stock of Subsidiary Company for
$365,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $50,000,
$100,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent uses the
simple equity method to account for its investment in subsidiary.
On January 1, 20X2, Parent purchased equipment for $174,120 and immediately leased the equipment to
Subsidiary on a 4-year lease. The transaction was legally structured as a sales-type lease with a present value for
the minimum lease payments of $204,120. Parent recorded the following entry:
Minimum Lease Payments Receivable
240,000
Unearned Interest Income
35,880
Equipment
174,120
Sales Profit on Lease
30,000
The minimum lease payments of $60,000 are to be made annually on January 1, beginning immediately, for a total of 4 payments. The implicit
interest rate is 12%. The lease provides for an automatic transfer of title at the end of 4 years. The estimated useful life of the equipment is 6 years.
The lease has been capitalized by both companies.
A lease amortization schedule, applicable to either company, is presented below:
Carrying
Carrying
Interest
Principal
Value on
Value
Rate
Interest
Payment
Reduction
1-1-X2
$204,120
– 60,000
1-1-X2
144,120
12%
$17,294
$60,000
$42,706
– 42,706
1-1-X3
101,414
12%
12,170
60,000
47,830
– 47,830
1-1-X4
53,584
12%
6,416*
60,000
53,584
– 53,584
1-1-X5
$ 0
*Adjusted for
rounding error.
Required:
Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-13 partial worksheet as of December 31, 20X2. Key and
explain all eliminations and adjustments.
Figure 5-13
Trial Balance
Parent
Adjustment
s
Account Titles
Company
Debit
Credit
Min. Lease Payments Rec.
180,000
Unearned Interest Income
(18,586)
Buildings and Equipment
350,000
Accumulated Depreciation
(100,000)
Equipment under Cap. Lease
Acc. Depr. – Eq. Cap. Lease
Obligation under Cap. Lease
Interest Payable on Lease
Operating & Other Expenses
120,000
Interest Income on Lease
(17,294)
Interest Expense on Lease
Sales Profit on Lease
(30,000)
(continued)
Consol.
Control.
Consol.
Income
Retained
Balance
Account Titles
Statement
NCI
Earnings
Sheet
Min. Lease Payments Rec.
Unearned Interest Income
Buildings and Equipment
Accumulated Depreciation
Equipment under Cap. Lease
Acc. Depr. – Eq. Cap. Lease
Obligation under Cap. Lease
Interest Payable on Lease
Operating & Other Expenses
Interest Income on Lease
Interest Expense on Lease
Sales Profit on Lease
For the parital worksheet solution, please refer to Answer 5-13.
Trial Balance
Eliminations and
Account Titles
Company
Company
Debit
Credit
Min. Lease Payments Rec.
180,000
(CL2)
180,000
Unearned Interest Income
(18,586)
(CL2)
18,586
Buildings and Equipment
350,000
300,000
(CL3)
204,120
(CL5)
30,000
Accumulated Depreciation
(100,000)
(50,000)
(CL6)
5,000
(CL4)
34,020
Equipment under Cap. Lease
204,120
(CL3)
204,120
Acc. Depr. – Eq. Cap. Lease
(34,020)
(CL4)
34,020
Obligation under Cap. Lease
(144,120)
(CL2)
144,120
Interest Payable on Lease
(17,294)
(CL2)
17,294
Operating & Other Expenses
120,000
42,706
(CL6)
5,000
Interest Income on Lease
(17,294)
(CL1)
17,294
Interest Expense on Lease
17,294
(CL1)
17,294
Sales Profit on Lease
(30,000)
(CL5)
30,000
Consol.
Control.
Consol.
Income
Retained
Balance
Account Titles
Statement
NCI
Earnings
Sheet
Min. Lease Payments Rec.
0
Unearned Interest Income
0
Buildings and Equipment
824,120
Accumulated Depreciation
(179,020)
Equipment under Cap. Lease
0
Acc. Depr. – Eq. Cap. Lease
0
Obligation under Cap. Lease
0
Interest Payable on Lease
0
Operating & Other Expenses
157,706
Interest Income on Lease
0
Interest Expense on Lease
0
51. The Planes Company owns 100% of the outstanding common stock of the Sands Company. Sands issued
$100,000 of face value, 9%, 10-year bonds on January 1, 20X3, for $96,000. The discount is being amortized
on a straight-line basis. On January 1, 20X8, Planes purchased all the bonds as an investment for $95,000.
Required:
Be specific in answering the following questions and include numerical explanations.
a.
How will this bond issue be recorded and accounted for in 20X8 on the separate books of Planes and Sands?
b.
How will this bond issue be accounted for on the 20X8 consolidated statements?
c.
How will this bond issue be recorded and accounted for in 20X9 on the separate books of Planes and Sands?
d.
How will this bond issue be accounted for on the 20X9 consolidated statements?
(CL1)
Eliminate the intercompany interest income and expense on the lease obligation (per table).
The payable is also $161,414 ($144,120 lease obligation payable plus $17,294 interest payable).
(CL3)
Reclassify the leased equipment as ordinary Building and Equipment.
(CL5)
Eliminate the Sales Profit on Lease and adjust the leased asset back to cost.
52. The Park Company owns 80% of the outstanding common stock of the Sea Company. Park is about to lease
a machine with a 5-year life to the Sea Company. The lease would begin January 1, 20X3.
Required:
Explain the adjustments that will be required in the consolidation process if each of the following occurs.
a.
The lease is an operating lease.
b.
The lease is a direct financing lease with a bargain purchase option.
c.
The lease is a sales-type lease with a bargain purchase option.
a normal productive asset.