Chapter 08 – Intercompany Indebtedness
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CHAPTER 8
INTERCOMPANY INDEBTEDNESS
ANSWERS TO QUESTIONS
Q8-1 A gain or loss on bond retirement is reported by the consolidated entity whenever (a) one
Q8-2 A constructive retirement occurs when the bonds of a company included in the
consolidated entity are purchased by another company included within the consolidated entity.
Q8-3 When bonds sold to an affiliate at par value are not eliminated, bonds payable and bond
investment are misstated in the balance sheet accounts and interest income and interest
Q8-4 Both the bond investment and interest income reported by the purchaser will be
improperly included. Interest expense, bonds payable, and any premium or discount recorded
Q8-5 If the focus is placed on the legal entity, only bonds actually reacquired by the debtor will
be treated as retired. This treatment can lead to incorrect reports for the consolidated entity in
two dimensions, 1) the interest expense/revenue on the bonds and 2) the gain/loss on
Q8-6 The difference in treatment is due to the effect of the transactions on the consolidated
entity. In the case of land sold to another affiliate, a gain has been recorded that is not a gain
from the viewpoint of the consolidated entity. Thus, it must be eliminated in the consolidation
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
C8-1 Recognition of Retirement Gains and Losses
a. When Flood purchases the bonds it establishes an investment account on its books and
Bradley establishes a bond liability and discount account on its books. No entry is made by
Century. When Century purchases the bonds, Century records an investment and Flood
removes the balance in the investment account and records a gain on the sale. Bradley makes
Bradley.
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
E8-1 Bond Sale from Parent to Subsidiary
a.
Journal entries recorded by Humbolt Corporation:
January 1, 20X2
Investment in Lamar Corporation Bonds
156,000
Cash
156,000
July 1, 20X2
Cash
4,500
Interest Income
4,271
Investment in Lamar Corporation Bonds
229
December 31, 20X2
Interest Receivable
4,500
Interest Income
4,264
Investment in Lamar Corporation Bonds
236
Chapter 08 – Intercompany Indebtedness
c. Consolidation entries:
Bonds Payable
100,000
Bond Premium
4,795
Interest Income
11,564
Investment in Nettle Corporation Bonds
104,795
Interest Expense
11,564
Interest Payable
6,000
Interest Receivable
6,000
Face Value
of Bonds
PMT #
Interest
$ PMT
Interest
Expense
Amort of
Discount
(Premium)
Premium
(Discount)
Bonds
Payable
BV of
Bonds
100,000.00 1/1/20X5 $5,975.19 100,000.00 $105,975.19
Stated rate = 1 7/1/20X5 6,000.00 5,828.64 (171.36) $5,803.83 100,000.00 $105,803.83
12% 2 1/1/20X6 6,000.00 5,819.21 (180.79) $5,623.04 100,000.00 $105,623.04
Annual 3 7/1/20X6 6,000.00 5,809.27 (190.73) $5,432.30 100,000.00 $105,432.30
Years = 4 1/1/20X7 6,000.00 5,798.78 (201.22) $5,231.08 100,000.00 $105,231.08
10
5 7/1/20X7 6,000.00 5,787.71 (212.29) $5,018.79 100,000.00 $105,018.79
Mkt Rate = 6 1/1/20X8 6,000.00 5,776.03 (223.97) $4,794.82 100,000.00 $104,794.82
11.000% 7 6,000.00 5,763.72 (236.28) $4,558.54 100,000.00 $104,558.54
8 6,000.00 5,750.72 (249.28) $4,309.26 100,000.00 $104,309.26
9 6,000.00 5,737.01 (262.99) $4,046.27 100,000.00 $104,046.27
10 6,000.00 5,722.54 (277.46) $3,768.81 100,000.00 $103,768.81
11
6,000.00 5,707.28 (292.72) $3,476.10 100,000.00 $103,476.10
12 6,000.00 5,691.19 (308.81) $3,167.28 100,000.00 $103,167.28
13 6,000.00 5,674.20 (325.80) $2,841.48 100,000.00 $102,841.48
14 6,000.00 5,656.28 (343.72) $2,497.77 100,000.00 $102,497.77
15 6,000.00 5,637.38 (362.62) $2,135.14 100,000.00 $102,135.14
16
6,000.00 5,617.43 (382.57) $1,752.58 100,000.00 $101,752.58
17 6,000.00 5,596.39 (403.61) $1,348.97 100,000.00 $101,348.97
18 6,000.00 5,574.19 (425.81) $923.16 100,000.00 $100,923.16
19
6,000.00 5,550.77 (449.23) $473.93 100,000.00 $100,473.93
20 6,000.00 5,526.07 (473.93) ($0.00) 100,000.00 $100,000.00
120,000.00 114,024.81 (5,975.19)
Discount Example