1. 10 - 0 Advanced Accounting by Debra Jeter and Paul Chaney Chapter 10: Consolidated Financial Statements - Miscellaneous Topics Slides Authored by Hannah Wong, Ph.D. Rutgers University

2. 10 - 1 Intercompany Bold Holdings lBonds acquired by an affiliate are no longer held by external parties lIn the consolidated financial statements: n the bonds are viewed as being constructively retired n record a gain or loss on this early retirement of debt

3. 10 - 2 Allocation of Constructive Gain/Loss n Entirely to the issuing company n Entirely to the purchasing company n Entirely to the parent company n Allocated between the purchasing and issuing companies Note: the allocation method affects the consolidated net income each year. However, it does not affect the total consolidated net income over the life of the issue.

4. 10 - 3 Computation of Constructive Gain/Loss Book value Par value Purchase price Constructive gain/loss allocated to issuing company Constructive gain/loss allocated to purchasing company

5. 10 - 4 Accounting for Intercompany Bonds P acquired S’s 9% bonds 12/31/2001 An Example Par value of bonds acquired = $500,000 x 60% Book value of bonds acquired = $480,000 x 60% Purchase price = $310,000 12/31/2003 Bond matures

6. 10 - 5 Accounting for Intercompany Bonds Book value $288,000 Par value $300,000 Purchase price $310,000 Constructive loss allocated to S Company Constructive loss allocated to P Company $12,000 $10,000

7. 10 - 6 Accounting for Intercompany Bonds Loss on constructive retirement of bonds10,000 Investment in S Bonds10,000 (1) To recognize the constructive loss not recorded by S and (2) adjust the intercompany bonds to par value Loss on constructive retirement of bonds12,000 Discount on bonds payable12,000 (1) To recognize the constructive loss not recorded by P and (2) adjust the intercompany bonds to par value Year of Intercompany Bond Purchase - EE’s

8. 10 - 7 Accounting for Intercompany Bonds Bonds payable300,000 Investment in S Bonds 300,000 To eliminate intercompany bond investment and liability Year of Intercompany Bond Purchase - EE’s

9. 10 - 8 Intercompany Bonds Cost and Partial Equity Methods Beginning retained earnings- P10,000 Investment in S Bonds10,000 (1) To recognize the constructive loss not recorded by S and (2) adjust the intercompany bonds to par value Beginning retained earnings- P9,600 Beginning retained earnings- S2,400 Discount on bonds payable12,000 (1) To record last year’s constructive loss not recorded by P and (2) adjust the intercompany bond investment to par value Year After Intercompany Bond Purchase - EE’s

10. 10 - 9 Intercompany Bonds Cost and Partial Equity Methods Investment in S Bonds2,500 Interest revenue2,500 To reverse amortization of discount recorded by S in the current year Discount on bonds payable3,000 Interest expense3,000 To reverse amortization of premium recorded by P in the current year Year After Intercompany Bond Purchase - EE’s

11. 10 - 10 Intercompany Bonds Cost and Partial Equity Methods Year After Intercompany Bond Purchase - EE’s Bonds payable300,000 Investment in S Bonds 300,000 To eliminate intercompany bond investment and liability Interest revenue27,000 Interest expense27,000 To eliminate intercompany bond interest

12. 10 - 11 Intercompany Bonds Complete Equity Method Investment in S 19,600 Beginning retained earnings- S 2,400 Discount on bonds payable12,000 Investment in S Bonds10,000 (1) To record last year’s constructive loss not recorded by P or S and (2) adjust the intercompany bond investment to par value Year After Intercompany Bond Purchase - EE’s

13. 10 - 12 Intercompany Bonds Complete Equity Method Investment in S Bonds2,500 Interest revenue2,500 To reverse amortization of discount recorded by S in the current year Discount on bonds payable3,000 Interest expense3,000 To reverse amortization of premium recorded by P in the current year Year After Intercompany Bond Purchase - EE’s

14. 10 - 13 Intercompany Bonds Complete Equity Method Year After Intercompany Bond Purchase - EE’s Bonds payable300,000 Investment in S Bonds 300,000 To eliminate intercompany bond investment and liability Interest revenue27,000 Interest expense27,000 To eliminate intercompany bond interest

15. 10 - 14 Consolidated NI-Year after Bond Purchase Reported income of P Constructive loss recorded by P in the current year (premium amortization) Reported NI of S + Constructive loss recorded by S in the current year (discount amortization) Consolidated net income Intercompany Bonds Dividend income P’s contribution to combined income Adjusted NI of S x P%

16. 10 - 15 Consolidated Retained Earnings Ending Reported R/E of P Increase in S R/E since acquisition Consolidated R/E Upstream Sales - Equipment Cost and Partial Equity Methods Constructive loss NOT recorded by P Increase in R/E of S - Constructive loss NOT recorded by S x P%

17. 10 - 16 Notes Receivable Discounted Parent Company Subsidiary Issues $100,000 note Discount note with bank If S credits notes receivable upon discounting the note, no adjustment is needed in consolidation. If S credits notes receivable discounted upon discounting the note, an adjustment is needed in consolidation: Dr Notes receivable discounted Cr Notes receivable

18. 10 - 17 Notes Receivable Discounted Parent Company Subsidiary Issues $100,000 note Discount note with bank If P and S credits notes receivable upon discounting the note, no adjustment is needed in consolidation. If P or S credits notes receivable discounted upon discounting the note, an adjustment is needed in consolidation: Dr Notes receivable discounted Cr Notes receivable Receives note from third party

19. 10 - 18 Stock Dividend from Subsidiary Journal Entries Stock dividend declared (or R/E)150,000 Capital stock150,000 Subsidiary Parent Memorandum entry only.

20. 10 - 19 Stock Dividend from Subsidiary Eliminating Entries Capital stock150,000 Stock dividend declared (or R/E)150,000 Year of stock dividend To reverse the subsidiary’s JE on stock dividend

21. 10 - 20 Subsidiary with Preferred Stock Book value of net assets Less: allocated to preferred stock par value + call premium + dividends in arrears = residual allocated to common stock

22. 10 - 21 Subsidiary with Preferred Stock Preferred stock held by parent Preferred stock not held by parent Common stock not held by parent Common stock held by parent Noncontrolling interest Controlling interest

23. 10 - 22 Controlling Interest in Net Income Reported income of P Other adjustments Adjusted NI of S assigned to preferred stock x (P’s prefered stock %) + Adjusted NI of S assigned to common stock x (P’s common stock %) Consolidated net income Subsidiary with Preferred Stock Dividend income P’s contribution to combined income P’s share of S adjusted income

24. 10 - 23 Advanced Accounting by Debra Jeter and Paul Chaney Copyright © 2001 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.