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Chapter 5--Intercompany Transactions: Bonds and Leases Key
1. The usual impetus for transactions that create a long-term debtor-creditor relationship between members of a
consolidated group is due to the:
2. The motivation of a parent company to purchase the outstanding bonds of a subsidiary could be to:
3. Intercompany debt that must be eliminated from consolidated financial statements may result from:
4. Elimination procedures for intercompany bonds purchased from outside parties by another member of the
consolidated group are:
5. In years subsequent to the year one member of a consolidated group purchases another member’s outstanding
bonds from outside parties, Consolidated Income Statements:
6. A subsidiary has outstanding $100,000 of 8% bonds that were issued at face value. The parent purchased all
the bonds for $96,000 with 5 years remaining to maturity. How will the parent's use of the effective interest
amortization rather than straight-line amortization of the discount affect the consolidated financial statements?
7. In the year when one member of a consolidated group purchases from outside parties the bonds of another
affiliate, the consolidated income statement includes:
8. On an income distribution schedule, any gain or loss resulting from intercompany bonds is charged to
9. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 8%, 10-year bonds sold
to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at
a price that reflected the current 9% effective interest rate. How should this event be reflected in the current
year's consolidated statements?
10. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 6%, 10-year bonds
sold to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding
bonds at a price that reflected the current 9% effective interest rate. How should this event be reflected in the
current year's consolidated statements?
11. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 6%, 10-year bonds
sold to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding
bonds at a price that reflected the current 6% effective interest rate. How should this event be reflected in the
current year's consolidated statements?
12. Company S is a 100%-owned subsidiary of Company P. On January 1, 20X9, Company S has $200,000 of
8% face rate bonds outstanding, which were issued at face value. The bonds had 5 years to maturity on January
1, 20X9. Premiums or discounts would be amortized on a straight-line basis. On that date, Company P
purchased the bonds for $198,000. The amount on the consolidated balance sheet relative to the debt is:
13. Company S is a 100%-owned subsidiary of Company P. On January 1, 20X3, Company S has $100,000 of
8% face rate bonds outstanding. The bonds had 5 years to maturity on January 1, 20X3, and had an unamortized
discount of $5,000. On that date, Company P purchased the bonds for $99,000. The net adjustment needed to
consolidate retained earnings on December 31, 20X3 is ____.
14. Sun Company is a 100%-owned subsidiary of Peter Company. On January 1, 20X1, Sun Company has
$500,000 of 8% face rate bonds outstanding, with an unamortized discount of $5,000 that is being amortized
over a 5 year remaining life to maturity. On that date, Peter Company purchased the bonds for $497,000. The
adjustment to the consolidated income of the two companies needed in the consolidation process for 20X2 (the
following year) is ____.
15. Company S is a 100%-owned subsidiary of Company P. Company P purchased, at a premium, Company S
bonds that are outstanding and have a remaining discount. Consolidation theory takes the position that:
16. Powell Company owns an 80% interest in Sauter, Inc. On January 1, 20X1, Sauter issued $400,000 of 10-
year, 12% bonds at a premium of $50,000. On December 31, 20X5, 5 years after original issuance, Powell
purchased all of the outstanding bonds for $390,000. Both firms use the straight-line method of amortization.
What is the gain on retirement on the 20X5 consolidated income statement?
17. Company P owns 80% of Company S. On January 1, 20X3 Company S has outstanding 6% bonds with a
face value of $200,000 and an unamortized discount of $3,000, which is being amortized on a straight-line basis
over a remaining term of 10 years. On January 1, 20X3, Company P purchased all the bonds for $205,000. The
premium also is amortized on a straight-line basis. The net impact of the purchase on the noncontrolling interest
as of December 31, 20X3, is ____.
18. Company S is a 100%-owned subsidiary of Company P. Company P purchased all the outstanding bonds of
Company S at a discount. The bonds had a remaining issuance premium at the time of Company P's purchase.
The bonds have 5 years to maturity. At the end of 5 years, consolidated retained earnings:
19. Powell Company owns an 80% interest in Sauter, Inc. On January 1, 20X1, Sauter issued $400,000 of 10-
year, 12% bonds at a premium of $50,000. On December 31, 20X5, 5 years after original issuance, Powell
purchased all of the outstanding bonds for $390,000. Both firms use the straight-line method of amortization.
The interest adjustment in the 20X5 subsidiary income distribution schedule is ____.
20. When one member of a consolidated group purchases only part of the outstanding bonds of another member
of the group (for example, 80% of the bonds),
21. Soap Company issued $200,000 of 8%, 5-year bonds on January 1, 20X6. The discount on issuance was
$12,000. Bond interest is paid annually on December 31. On December 31, 20X8, Pumice Company purchased
one-half of the outstanding bonds for $96,000. Both companies use the straight-line method of amortization.
How much bond interest expense will appear on the December 31, 20X8, consolidated income statement?
22. Soap Company issued $200,000 of 8%, 5-year bonds on January 1, 20X6. The discount on issuance was
$12,000. Bond interest is paid annually on December 31. On December 31, 20X8, Pumice Company purchased
one-half of the outstanding bonds for $96,000. Both companies use the straight-line method of amortization.
How much interest expense will appear on the December 31, 20X9, consolidated income statement?
23. Soap Company issued $200,000 of 8%, 5-year bonds on January 1, 20X6. The discount on issuance was
$12,000. Bond interest is paid annually on December 31. On December 31, 20X8, Pumice Company purchased
one-half of the outstanding bonds for $96,000. Both companies use the straight-line method of amortization.
What amount of gain or loss from retirement of debt will be reported on the 20X8 consolidated financial
statements?
24. The purchase of outstanding subsidiary bonds by the parent company has the same impact on consolidated
statements as:
25. Leasing subsidiaries are formed to achieve centralized asset management through leasing to affiliated firms,
and when they are consolidated with the parent, they are consolidated
26. The effect of an operating lease on the income distribution schedule:
27. Lease terms can be considered to be "significantly affected":
28. The parent company leased a machine to its subsidiary using a direct-financing lease that included a bargain
purchase option. As a result of the intercompany lease, the following items should be eliminated in the
consolidation process:
Depreciation
Machine Debt Interest Expense
29. Park owns an 80% interest in the common stock of Stable Company. Park leased a machine to Stable under
a 5-year, direct financing lease with a bargain purchase option. The lease term began January 1, 20X4. The
impact of the lease on the Noncontrolling share of income for 20X4:
30. Phil Company leased a machine to its 100%-owned subsidiary, Scout Company. The direct financing lease
required annual lease payments in advance of $2,319 for 5 years. The present value of the minimum lease
payments at 8% interest is $10,000. The adjustment needed to arrive at consolidated net income for the first
year after the lease is ____.
31. Phil Company leased a machine to its 100%-owned subsidiary, Scout Company. The direct financing lease
required annual lease payments in advance of $2,319 for 5 years. The present value of the minimum lease
payments at 8% interest is $10,000. The adjustment of assets and liabilities needed to prepare a consolidated
balance sheet is to eliminate the:
32. Under a sales-type lease between affiliated companies, how does the lessor treat the intercompany profit at
the inception of the lease?
33. Consolidation procedures for sales-type leases:
34. Which of the following statements is true?
35. Which of the following statements is true?
36. When there is an unguaranteed residual value for the lessor in a direct-financing lease, this means:
37. What is recorded by the lessee and the lessor when an intercompany lease contains an unguaranteed residual
value?
Lessee Lessor
38. On January 1, 20X3, Pope Company acquired 100% of the common stock of Siegel Company for $300,000.
On this date Siegel had total owners' equity of $250,000. Any excess of cost over book value is attributable to
goodwill. Pope accounts for its investment in Siegel using the simple equity method.
On July 1, 20X3, Siegel Company sold to outside investors $300,000 par value of 10-year, 10% bonds. The
price received was equal to par. The bonds pay interest semi-annually on July 1 and January 1.
During early 20X4, market interest rates on bonds similar to those issued by Siegel decreased to 8%. As a
result, the market value of the bonds increased. On July 1, 20X4, Pope purchased $150,000 par value of Siegel's
bonds, paying $163,000. Pope still holds the bonds on December 31, 20X4 and has amortized the premium,
using the straight-line method.
Required:
Complete the Figure 5-1 worksheet for consolidated financial statements for the year ended December 31,
20X4. Round all computations to the nearest dollar.
Figure 5-1
Trial Balance
Eliminations and
Pope
Siegel
Adjustment
s
Account Titles
Company
Company
Debit
Credit
Interest Receivable
7,500
Other Current Assets
157,212
371,000
Investment in Sub. Company
410,000
Investment in Sub. Bonds
162,278
Land
50,000
30,000
Buildings and Equipment
350,000
380,000
Rent Receivable
(100,000)
(50,000)
Goodwill
Interest Payable
(15,000)
Other Current Liabilities
(120,000)
(56,000)
Bonds Payable, 10%
(300,000)
Other Long-Term Liabilities
(200,000)
Common Stock – P Co.
(200,000)
Other Paid-in Capital – P Co.
(100,000)
Retained Earnings – P Co.
(280,212)
Common Stock – S Co.
(50,000)
Other Paid-in Capital – S Co.
(70,000)
Retained Earnings – S Co.
(180,000)
Net Sales
(500,000)
(400,000)
Cost of Goods Sold
300,000
240,000
Operating Expenses
100,000
50,000
Interest Expense
30,000
Interest Income
(6,778)
Subsidiary Income
(80,000)
Dividends Declared – P Co.
50,000
Dividends Declared – S Co.
20,000
Loss on Retirement of Bonds
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
Interest Receivable
Other Current Assets
Investment in Sub. Company
Investment in Sub. Bonds
Land
Buildings and Equipment
Rent Receivable
Goodwill
Interest Payable
Other Current Liabilities
Bonds Payable, 10%
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 Expense
Interest Income
Subsidiary Income
Dividends Declared – P Co.
Dividends Declared – S Co.
Loss on Retirement of Bonds
Consolidated Net Income
To NCI
To Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
For the worksheet solution, please refer to Answer 5-1.
39. On January 1, 20X3, Pope Company acquired 100% of the common stock of Siegel Company for $300,000.
On this date Siegel had total owners' equity of $250,000. Any excess of cost over book value is attributable to
goodwill. Pope accounts for its investment in Siegel using the simple equity method.
Also on July 1, 20X3, Siegel Company sold to outside investors $200,000 par value of 10-year, 10% bonds. The
price received was equal to par. The bonds pay interest semi-annually on July 1 and January 1.
During early 20X4, market interest rates on bonds similar to those issued by Siegel decreased to 8%. As a
result, the market value of the bonds increased. On July 1, 20X4, Pope purchased $100,000 par value of Siegel's
bonds, paying $112,695. Pope still holds the bonds on December 31, 20X4 and has amortized the premium,
using the effective-interest method which has resulted in interest income of $4,508 and a balance in the
Investment in Subsidiary Bonds account of $112,203.
Required:
Prepare the eliminating entries pertaining to the intercompany purchase of the bonds for the year ended
December 31, 20X4.
40. On January 1, 20X3, Pope Company acquired 100% of the common stock of Siegel Company for $300,000.
On this date Siegel had total owners' equity of $250,000. Any excess of cost over book value is attributable to
goodwill. Pope accounts for its Investment in Siegel using the simple equity method.
On January 1, 20X3, Siegel Company sold to outside investors $300,000 par value of 10-year, 10% bonds. The
price received was equal to par. The bonds pay interest semi-annually on July 1 and January 1.
During 20X3, market interest rates on bonds similar to those issued by Siegel decreased to 8%. As a result, the
market value of the bonds increased. On December 31, 20X3, Pope purchased $150,000 par value of Siegel's
bonds, paying $163,000. Pope still holds the bonds on December 31, 20X4 and has amortized the premium,
using the straight-line method.
Required:
Prepare the eliminating entries pertaining to the intercompany purchase of bonds outstanding for the year ended
December 31, 20X4.
Eliminations and Adjustments:
41. On January 1, 20X4, Parent Company purchased 90% of the common stock of Subsidiary Company for
$450,000. 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 cost 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:
Complete the Figure 5-4 worksheet for consolidated financial statements for the year ended of December 31,
20X5. Round all computations to the nearest dollar.
Figure 5-4
Trial Balance
Eliminations and
Parent
Sub.
Adjustment
s
Account Titles
Company
Company
Debit
Credit
Interest Receivable
3,000
Other Current Assets
214,400
340,500
Investment in Sub. Company
450,000
Investment in Sub. Bonds
96,800
Land
100,000
50,000
Buildings and Equipment
400,000
290,000
Rent Receivable
(150,000)
(70,000)
Goodwill
Interest Payable
(3,000)
Other Current Liabilities
(114,000)
(70,000)
Bonds Payable, 6%
(100,000)
Discount on Bonds Payable
2,400
Other Long-Term Liabilities
(200,000)
Common Stock – P Co.
(50,000)
Other Paid-in Capital – P Co.
(250,000)
Retained Earnings – P Co.
(400,000)
Common Stock – S Co.
(20,000)
Other Paid-in Capital – S Co.
(130,000)
Retained Earnings – S Co.
(250,000)
Net Sales
(630,000)
(360,000)
Cost of Goods Sold
350,000
210,000
Operating Expenses
163,200
73,800
Interest Expense
6,300
Interest Income
(6,400)
Dividend Income
(27,000)
Dividends Declared – P Co.
50,000
Dividends Declared – S Co.
30,000
Gain on Retirement of Bonds
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
Interest Receivable
Other Current Assets
Investment in Sub. Company
Investment in Sub. Bonds
Land
Buildings and Equipment
Rent Receivable
Goodwill
Interest Payable
Other Current Liabilities
Bonds Payable, 6%
Discount 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 Expense
Interest Income
Dividend Income
Dividends Declared – P Co.
Dividends Declared – S Co.
Gain on Retirement of Bonds
Consolidated Net Income
To NCI
To Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
For the worksheet solution, please refer to Answer 5-4.
