Chapter 08 – INTERCOMPANY INDEBTEDNESS
8-9
E8-9A
LO 8-3
15 min.
M
Retirement of Bonds Sold at a Discount (Straight-Line Method)
Parent company bonds issued at a discount are purchased by a subsidiary from a
nonaffiliate seven years after the date of issue. A constructive loss is recognized.
The elimination entry at the end of the year in which the subsidiary purchases the
bonds is required.
E8-10
LO 8-2
10 min.
M
Loss on Constructive Retirement (Effective Interest Method)
The elimination entries in the period of a constructive bond retirement are
required when the subsidiary purchases parent company bonds at the start of the
period and a constructive loss is recognized in the consolidated statements.
E8-10A
LO 8-2
10 min.
M
Loss on Constructive Retirement (Straight-Line Method)
The elimination entries in the period of a constructive bond retirement are
required when the subsidiary purchases parent company bonds at the start of the
period and a constructive loss is recognized in the consolidated statements.
E8-11
LO 8-2
15 min.
M
Determining the Amount of Retirement Gain or Loss (Effective Interest
Method)
Given partial financial statement information for the parent and subsidiary,
students are required to compute interest expense to be reported in the
consolidated income statement and the gain on a constructive bond retirement.
The entries to eliminate the effects of parent company ownership of subsidiary
bonds also are required.
E8-11A
LO 8-2
15 min.
M
Determining the Amount of Retirement Gain or Loss (Straight-Line
Method)
Given partial financial statement information for the parent and subsidiary,
students are required to compute interest expense to be reported in the
consolidated income statement and the gain on a constructive bond retirement.
The entries to eliminate the effects of parent company ownership of subsidiary
bonds also are required.
E8-12
LO 8-3
25 min.
M
Evaluation of Bond Retirement (Effective Interest Method)
A constructive gain on bond retirement occurs when the parent purchases
subsidiary bonds from a nonaffiliate at mid-year. The amount of the gain or loss,
where it is reported, the effect on consolidated net income for the year, and the
amount of income assigned to the noncontrolling interest must be determined.
Elimination entries at the end of the year of purchase and the year following are
required.
Chapter 08 – INTERCOMPANY INDEBTEDNESS
8–10
E8-12A
LO 8-3
25 min.
M
Loss on Constructive Retirement (Straight-Line Method)
A constructive gain on bond retirement occurs when the parent purchases
subsidiary bonds from a nonaffiliate at mid-year. The amount of the gain or loss,
where it is reported, the effect on consolidated net income for the year, and the
amount of income assigned to the noncontrolling interest must be determined.
Elimination entries at the end of the year of purchase and the year following are
required.
E8-13
LO 8-4
20 min.
M
Consolidation of Intercorporate Bond Holdings (Effective Interest Method)
A constructive loss on bond retirement occurs when the parent purchases
subsidiary bonds from a nonaffiliate. Elimination entries relating to the bonds at
the end of the year of purchase and the following year are required. Income to the
noncontrolling interest in the year of purchase must be computed.
E8-13A
LO 8-4
20 min.
M
Loss on Contructive Retirement (Straight-Line Method)
A constructive loss on bond retirement occurs when the parent purchases
subsidiary bonds from a nonaffiliate. Elimination entries relating to the bonds at
the end of the year of purchase and the following year are required. Income to the
noncontrolling interest in the year of purchase must be computed.
P8-14
LO 8-2
50 min.
M
Consolidation Worksheet with Sale of Bonds to Subsidiary (Effective
Interest Method)
Trial balances for the parent company and its partially-owned subsidiary are
presented. Students must prepare journal entries made by the parent company
related to its equity investment and the inter-company bonds, and by the
subsidiary related to its investment in the parent’s bonds. Students must also
prepare elimination entries needed for consolidation and prepare a three-part
consolidated worksheet for the second year after the acquisition and issuance of
the inter-company bonds.
P8-14A
LO 8-2
50 min.
M
Consolidation Worksheet with Sale of Bonds to Subsidiary (Straight-Line
Method)
Trial balances for the parent company and its partially-owned subsidiary are
presented. Students must prepare journal entries made by the parent company
related to its equity investment and the inter-company bonds, and by the
subsidiary related to its investment in the parent’s bonds. Students must also
prepare elimination entries needed for consolidation and prepare a three-part
consolidated worksheet for the second year after the acquisition and issuance of
the inter-company bonds.
Chapter 08 – INTERCOMPANY INDEBTEDNESS
8–11
P8-15
LO 8-2
50 min.
M
Consolidation Worksheet with Sale of Bonds to Parent (Effective Interest
Method)
Trial balances for the parent company and its partially-owned subsidiary are
presented. Students must prepare journal entries made by the parent related to its
equity investment and the inter-company bonds, and by the subsidiary related to
the inter-company bonds. Students must also prepare elimination entries needed
for consolidation, and prepare a three-part consolidated work paper for the third
year after acquisition and issuance of the bonds.
P8-15A
LO 8-2
50 min.
M
Consolidation Worksheet with Sale of Bonds to Parent (Straight-Line
Method)
Trial balances for the parent company and its partially-owned subsidiary are
presented. Students must prepare journal entries made by the parent related to its
equity investment and the inter-company bonds, and by the subsidiary related to
the inter-company bonds. Students must also prepare elimination entries needed
for consolidation, and prepare a three-part consolidated work paper for the third
year after acquisition and issuance of the bonds.
P8-16
LO 8-2
40 min.
M
Direct Sale of Bonds to Parent (Effective Interest Method)
Trial balance information for the parent and subsidiary are provided following a
direct purchase of subsidiary bonds at a discount. Entries recorded by the parent
and subsidiary, elimination entries, and a three-part consolidation worksheet at
the end of the period are required.
P8-16A
LO 8-2
40 min.
M
Direct Sale of Bonds to Parent (Straight-Line Method)
Trial balance information for the parent and subsidiary are provided following a
direct purchase of subsidiary bonds at a discount. Entries recorded by the parent
and subsidiary, elimination entries, and a three-part consolidation worksheet at
the end of the period are required.
P8-17
LO 8-3
25 min.
M
Information Provided in Consolidation Entry (Effective Interest Method)
The bond elimination entry is given two years after a purchase of bonds from a
nonaffiliate. The parent company must be identified, the proportion of subsidiary
ownership held by the parent, amount paid to acquire the bonds, the constructive
gain or loss recognized at the date of purchase, consolidated net income
considering the elimination entry and the amount of income assigned to the
noncontrolling interest in the current year must be determined. The bond
elimination entry at the end of the following year must be prepared.
Chapter 08 – INTERCOMPANY INDEBTEDNESS
8–12
P8-17A
LO 8-3
25 min.
M
Information Provided in Consolidation Entry (Straight-Line Method)
The bond elimination entry is given two years after a purchase of bonds from a
nonaffiliate. The parent company must be identified, the proportion of subsidiary
ownership held by the parent, amount paid to acquire the bonds, the constructive
gain or loss recognized at the date of purchase, consolidated net income
considering the elimination entry and the amount of income assigned to the
noncontrolling interest in the current year must be determined. The bond
elimination entry at the end of the following year must be prepared.
P8-18
LO 8-4
25 min.
M
Prior Retirement of Bonds (Effective Interest Method)
The bond elimination entry is given for the year after subsidiary company bonds
were purchased by the parent. The amount paid to acquire the bonds must be
determined, journal entries made by the parent to record interest income and the
subsidiary to record interest expense must be recorded, the bond elimination
entry for the prior year must be prepared, and consolidated net income and
income to controlling interest for the prior and current years must be computed.
P8-18A
LO 8-4
25 min.
M
Prior Retirement of Bonds (Straight-Line Method)
The bond elimination entry is given for the year after subsidiary company bonds
were purchased by the parent. The amount paid to acquire the bonds must be
determined, journal entries made by the parent to record interest income and the
subsidiary to record interest expense must be recorded, the bond elimination
entry for the prior year must be prepared, and consolidated net income and
income to controlling interest for the prior and current years must be computed.
P8-19A
LO 8-2
15 min.
H
Incomplete Data (Straight-Line Method)
An incomplete bond elimination entry is provided. The price paid to purchase the
bonds, the carrying amount of the bonds on the subsidiary’s books, and income
assigned to the noncontrolling interest for the period are computed.
P8-20
LO 8-4
35 min.
H
Balance Sheet Consolidations (Effective Interest Method)
Elimination entries, a consolidated balance sheet worksheet, and a consolidated
balance sheet are required. The parent purchased subsidiary bonds from a
nonaffiliate at the start of the preceding year.
P8-20A
LO 8-4
35 min.
H
Balance Sheet Consolidations (Straight-Line Method)
Elimination entries, a consolidated balance sheet worksheet, and a consolidated
balance sheet are required. The parent purchased subsidiary bonds from a
nonaffiliate at the start of the preceding year.
P8-21
LO 8-4
30 min.
M
Computations Relating to Bond Purchase from Nonaffiliate (Effective
Interest Method)
Partial trial balance data is given at the end of the period. The purchase price of
subsidiary bonds and the gain on constructive retirement are computed and the
elimination entries relating to the intercorporate bond ownership are required.
Chapter 08 – INTERCOMPANY INDEBTEDNESS
8–13
P8-21A
LO 8-4
30 min.
M
Computations Relating to Bond Purchase from Nonaffiliate (Straight-Line
Method)
Partial trial balance data is given at the end of the period. The purchase price of
subsidiary bonds and the gain on constructive retirement are computed and the
elimination entries relating to the intercorporate bond ownership are required.
P8-22B
LO 8-2
25 min.
M
Computations following Parent’s Acquisition of Subsidiary Bonds (Effective
Interest Method)
A determination of the gain on bond retirement, the elimination entry to remove
the effects of intercorporate bond ownership, and the balance of consolidated
retained earnings are required. Partial financial statement information is given at
the end of the period following a purchase of subsidiary bonds from a
nonaffiliate.
P8-22A
LO 8-2
25 min.
M
Computations following Parent’s Acquisition of Subsidiary Bonds (Straight-
Line Method)
A determination of the gain on bond retirement, the elimination entry to remove
the effects of intercorporate bond ownership, and the balance of consolidated
retained earnings are required. Partial financial statement information is given at
the end of the period following a purchase of subsidiary bonds from a
nonaffiliate.
P8-23
LO 8-2
45 min.
M
Consolidation Worksheet-Year of Retirement (Effective Interest Method)
A consolidation worksheet and consolidated financial statements are required.
The parent has acquired subsidiary bonds from a nonaffiliate at the end of the
current period.
P8-23A
LO 8-2
45 min.
M
Consolidation Worksheet-Year of Retirement (Straight-Line Method)
A consolidation worksheet and consolidated financial statements are required.
The parent has acquired subsidiary bonds from a nonaffiliate at the end of the
current period.
P8-24
LO 8-4
45 min.
M
Consolidation Worksheet-Year after Retirement (Effective Interest Method)
A consolidation worksheet and consolidated financial statements are required.
The parent has acquired subsidiary bonds from a nonaffiliate at the end of the
prior period with a constructive loss occurring.
Chapter 08 – INTERCOMPANY INDEBTEDNESS
8–14
P8-24A
LO 8-4
45 min.
M
Consolidation Worksheet-Year after Retirement (Straight-Line Method)
A consolidation worksheet and consolidated financial statements are required.
The parent has acquired subsidiary bonds from a nonaffiliate at the end of the
prior period with a constructive loss occurring.
P8-25
LO 8-3
50 min.
H
Intercorporate Inventory and Debt Transfers (Effective Interest Method)
Trial balance data for the parent and subsidiary are provided. Unrealized
upstream inventory profits are present at the beginning of the year and
downstream profits are present at the end of the year. A constructive gain on the
purchase of subsidiary bonds was reported two years earlier. The amounts
reported as consolidated cost of goods sold, inventory, and income to the
noncontrolling interest must be computed. Also, journal entries to record interest
expense by subsidiary and interest income by parent must be computed.
Elimination entries and a consolidation worksheet must be prepared.
P8-25A
LO 8-3
50 min.
H
Intercorporate Inventory and Debt Transfers (Straight-Line Method)
Trial balance data for the parent and subsidiary are provided. Unrealized
upstream inventory profits are present at the beginning of the year and
downstream profits are present at the end of the year. A constructive gain on the
purchase of subsidiary bonds was reported two years earlier. The amounts
reported as consolidated cost of goods sold, inventory, and income to the
noncontrolling interest must be computed. Also, journal entries to record interest
expense by subsidiary and interest income by parent must be computed.
Elimination entries and a consolidation worksheet must be prepared.
P8-26
LO8-4
50 min.
H
Intercorporate Bond Holdings and Other Transfers (Effective Interest
Method)
Balance sheet and income statement data for the parent and subsidiary are
provided. A downstream sale of depreciable assets occurred in the prior year, an
upstream sale of land occurred three years earlier, and a constructive loss on the
purchase of subsidiary bonds was reported in the prior year. Elimination entries
and a three-part consolidation worksheet are required.
P8-26A
LO8-4
50 min.
H
Intercorporate Bond Holdings and Other Transfers (Straight-Line Method)
Balance sheet and income statement data for the parent and subsidiary are
provided. A downstream sale of depreciable assets occurred in the prior year, an
upstream sale of land occurred three years earlier, and a constructive loss on the
purchase of subsidiary bonds was reported in the prior year. Elimination entries
and a three-part consolidation worksheet are required.
P8-27B
LO 8-3,
LO 8-4
50 min.
H
Comprehensive Multiple-Choice Questions (Modified Equity Method)
Ten multiple-choice questions have been developed to cover the major
computations involved when a differential assigned to buildings and to goodwill
exists, unrealized inventory profits exist at both the beginning and end of the
period, and the parent purchases subsidiary bonds at the start of the current
period at a loss.
Chapter 08 – INTERCOMPANY INDEBTEDNESS
8–15
P8-28
LO 8-2,
LO 8-3
60 min.
H
Comprehensive Problem: Intercorporate Transfers (Effective Interest
Method)
Intercorporate bonds and inventory transactions are presented within a
comprehensive problem. Students must determine the appropriate goodwill, the
value of the investment account, and the gain or loss on the constructive
retirement of the bonds. The noncontrolling interest’s share of income and net
assets must also be computed. After these computations, students are then asked
to prepare the elimination entries and the three-part consolidation worksheet for
the parent and its 90 percent-owned subsidiary.
P8-28A
LO 8-3,
LO 8-4
60 min.
H
Comprehensive Problem: Intercorporate Transfers (Straight-Line Method)
Intercorporate bonds and inventory transactions are presented within a
comprehensive problem. Students must determine the appropriate goodwill, the
value of the investment account, and the gain or loss on the constructive
retirement of the bonds. The noncontrolling interest’s share of income and net
assets must also be computed. After these computations, students are then asked
to prepare the elimination entries and the three-part consolidation worksheet for
the parent and its 90 percent-owned subsidiary.
P8-29B
LO 8-2,
LO 8-3
60 min.
H
Comprehensive Problem: Intercorporate Transfers (Modified Equity
Method)
An adjusted trial balance, journal entries recorded on the parent’s books under the
modified equity method, elimination entries, and a consolidation worksheet are
required. Differences in the consolidation process between the basic equity
method and the modified equity method are clearly illustrated by working both
P8-28 and P8-29A.
P8-30B
60 min.
H
Cost Method
Revised trial balance totals for the parent company are presented to convert P8-
24 to the cost method. The journal entries recorded by the parent under the cost
method, elimination entries, and a consolidation worksheet are required.
Differences in the consolidation process between the basic equity method and the
cost method are clearly illustrated by working both P8-24 and P8-30B.