CHAPTER 9

Intercompany Bond Holdings and Miscellaneous Topics –

Consolidated Financial Statements
BRIEF OUTLINE
9.1 Intercompany Bond Holdings 9.6 Interim Purchase of Intercompany Bonds
9.2 Accounting for Bonds – A Review 9.7 Notes Receivable Discounted
9.3 Constructive Gain or Loss on Intercompany 9.8 Stock Dividends Issued by a Subsidiary Company
Bond Holdings 9.9 Dividends from Preacquisition Earnings
9.4 Accounting for Intercompany Bonds Illustrated 9.10 Subsidiary with both Preferred and Common Stock Outstanding
9.5 Book Entry Related to Bond Investment 9.11 Consolidating a Subsidiary with Preferred Stock Outstanding

INTRODUCTION

A number of different topics are covered in this chapter. The first has to do with intercompany bond
holdings. Often one affiliate will buy the bonds of another affiliate – we will treat this as a constructive
retirement. We will also discuss intercompany discounting of notes receivable, S’s stock dividends, and
S’s preferred stock. You’ll see a significant similarity with many of the intercompany transactions we’ve
discussed in earlier chapters and you’ll also see some totally new ideas.

CHAPTER OUTLINE

9.1 Intercompany Bond Holdings

A. Constructive retirement
1. One affiliate buys the bonds of another affiliate
2. The consolidated entity cannot owe money to itself, so the bonds have in essence been
bought back – constructive retirement
B. Since this is early retirement of debt, there is a gain or loss on the constructive retirement that
must be accounted for in the consolidated entity
9.2 Accounting for Bonds – A Review
A. Basics
1. Bonds can be sold at less (discount) or more (premium) than par value
2. Generally, bond price is determined by the relation between the coupon rate and the
current market rate for similar investments
B. Premium or discount
1. Amortized over the remaining life of the bond
2. Premiums decrease interest expense to the issuer
3. Discounts increase interest expense to the issuer
C. Entries
1. The books of the investor company and issuing company are reciprocal – receivable
against payable, revenue against expense
2. For the issuing company
To issue bonds at a discount – date of issue
Cash
Discount on Bonds
Bonds Payable
Study Guide to accompany Jeter and Chaney, Advanced Accounting

To pay interest and amortize bond discount

Interest Expense
Cash
Interest Expense
Discount on Bonds
3. For the investor company
To buy bonds – date of issue
Investment in Bonds
Cash
To record interest
Cash
Interest Revenue
To record amortization of bond premium
Investment in Bonds
Interest Revenue
9.3 Constructive Gain or Loss on Intercompany Bond Holdings
A. On the books of the affiliates, the bond transactions are recorded like any other bond
transactions
B. The consolidated statements must show the constructive retirement of the bonds
1. The constructive gain or loss on retirement shows up on the consolidated statements
when the intercompany bond transaction occurs – before it is recorded in any books
2. This is backwards from unrealized profit and unrealized gain, which are deferred and
recognized later
3. It is still an issue of timing
a. The consolidated entity recognizes the constructive gain or loss immediately
b. The issuer and investor companies record it over the life of the bonds
C. Allocation of constructive gain or loss
1. There are four techniques available for allocating the constructive gain or loss
a. All to issuing company – the purchasing company acts as an agent for the issuing
company
b. All to purchasing company – the purchasing company initiates the transaction
c. All to P – P’s management controls all the affiliate’s financing decisions
d. Part to issuing company and part to purchasing company – gain or loss is part of both
issuing and purchasing, so the gain or loss should be allocated to both and spread out
over the life of the bond
2. Our book uses the fourth option
3. Computing the constructive gain or loss
a. On the purchase date, the total constructive gain or loss is calculated by determining
the difference between the book value of the bonds and their purchase price
b. Allocation rules
i. Issuing company gets the difference between book value and par value
(a) If book value > par value, there is a gain
(b) If book value < par value, there is a loss
ii. Purchasing company gets the difference between par value and purchase price
(a) If par value > purchase price, there’s a gain
(b) If par value < purchase price, there’s a loss
c. The total of the issuing company’s gain or loss plus the purchasing company’s gain or
loss should equal the total constructive gain or loss as calculated in a. above

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9.4 Accounting for intercompany bonds illustrated

A. Entries related to bond investment
1. Book entry
To record investment in affiliate’s bonds
Investment in bonds
Cash

2. Workpaper entries – year of transaction (assuming constructive loss)

To recognize constructive loss on intercompany bond investment
(purchaser’s share – par value-purchase price)
Loss on Constructive Retirement
Investment in Issuer’s Bonds
To recognize constructive loss on intercompany bond retirement
(issuer’s share – book value-par value)
Loss on Constructive Retirement
Discount on Bonds Payable
To eliminate intercompany bonds
Bonds Payable
Investment in Bonds

3. An alternative entry – combines all three entries above

To recognize constructive loss and allocate it between issuer and purchaser
Loss on Constructive Retirement
Bonds payable
Discount on Bonds Payable
Investment in Issuer’s Bonds

4. Entries – first year subsequent

Purchasing company’s books
To record intercompany interest revenue
Cash
Interest Revenue
To record amortization of premium
Interest revenue
Investment in Issuing Company’s Books
Issuing company’s books
To record bond interest paid
Interest Expense
Cash
To record amortization of bond discount
Interest Expense
Discount on Bonds Payable

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5. Workpaper entries – cost or partial equity and upstream

To establish reciprocity between investment and liability, and convert investment to
equity
Beginning Retained Earnings – P
(total constructive loss)
Investment in S Bonds
To eliminate prior year’s constructive loss – purchasing company (P)
Beginning Retained Earnings – P
Investment in S Bonds
To eliminate prior year’s constructive loss – issuing company (S)
Beginning Retained Earnings – P (P’s%)
Noncontrolling Interest (noncontrolling interest %)
Discount on Bonds Payable

To eliminate amortization of bonds premium – P

Investment in S Bonds
Interest Revenue
To eliminate amortization of bond discount – S
Discount on Bonds Payable
Interest Expense
To eliminate intercompany bonds
Bonds Payable – S
Investment in Ponds – P

6. An alternative to replace the entries above

To eliminate intercompany bond transactions
Beginning Retained Earnings – P
Noncontrolling Interest
Interest Revenue
Bonds Payable
Interest Expense
Discount on Bonds
Investment in Bonds
7. The complete equity method is the same as above except the debits to beginning retained
earnings – P will change to investment in S
B. Workpaper entries – second year subsequent to intercompany transaction
1. The first two entries above are the same
2. The new entries
To reverse amortization of premium for current and prior year
Investment in S Bonds
Beginning Retained Earnings – P * (last year’s)
Interest Revenue (this year’s)
To reverse amortization of discount for current and prior year
Discount on Bonds Payable
Beginning Retained Earning – P * (last year’s)
Interest Expense (this year’s)
* if using the complete equity method, Investment in
S
9.5 There is a three-year comparison in your book. Review it carefully!

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9.6 Interim Purchase of Intercompany Bonds

A. If bonds are not purchased at the end of the year, we must account for the part of the
constructive loss already recorded by the companies
B. The entries to originally recognize the constructive loss will change
To record the loss on constructive retirement of bonds – P’s books
Loss on Constructive Retirement
Interest Revenue (amount recorded as
amortization of premium)
Investment in Bonds
To record the loss on constructive retirement of bonds – S’s books
Loss on Constructive Retirement
Interest Expense (amount recorded as amortization
of discount)
Discount on Bonds Payable
9.7 Notes Receivable Discounted - (See online content at www.wiley.com/college/jeter)
A. When a company that’s loaned money to an affiliate later discounts that note (sells it to
another party), what part is to be eliminated and what part should be included on the
consolidated statements must be determined
1. A receivable on the consolidated balance sheet should only be from outsiders
2. A contingent liability should be disclosed for the discounted note
B. To discount an intercompany note receivable (ignoring interest!)
1. On the books
To discount an intercompany note receivable
Cash
Note Receivable
-or-
Cash
Note Receivable Discounted
2. Workpaper entries
a. If the first entry above is used, there’s no eliminating entry
b. If the second entry is used, eliminate the extra note receivable against the note
receivable discounted
To eliminate intercompany note
Note Receivable Discounted
Note Receivable
C. P discounts a note receivable from a customer to S
1. First method – no eliminating entry necessary
2. Second method – 3 note receivable accounts, one note receivable discounted
To eliminate intercompany note discounted
Note Receivable Discounted
Note Receivable
D. Then S discounts the note to C, an outsider
1. First method – no elimination necessary
2. Second method, 2 note receivable accounts, 2 notes receivable discounted
To eliminate intercompany note discounted
Note Receivable Discounted
Note Receivable

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9.8 Stock Dividends Issued by a Subsidiary Company

A. Definition – if S issues a stock dividend, P records it as a memorandum entry
1. P’s share of S’s total equity is the same
2. The stock dividend is assumed to be issued out of S’s oldest retained earnings
B. On S’s books, a transfer from retained earnings to common stock is recorded
1. Large dividend (greater than 20-25%) – stock dividends are recorded at par value
2. Small dividend (less than 20%) – stock dividends are recorded at market value, using
other contributed capital as the balancing account
C. Workpaper entries
1. Year of dividend
To eliminate stock dividend and restate common stock
Common Stock – S
Stock Dividend Declared – S (P’s%)
To eliminate P’s investment in S
Beginning Retained Earnings – S
Common Stock – S
Investment in S
Noncontrolling Interest
2. Subsequent years
To eliminate P’s investment in S
Beginning Retained Earnings – S
(has had dividend removed)
Common Stock – S (original amount + dividend)
Investment in S
Noncontrolling Interest
D. Stock dividends issued from postacquisition earnings
1. If the stock dividend issued exceeds S’s retained earnings at acquisition, some of the
stock dividends are from S’s earnings since acquisition
2. The consolidated retained earnings then has some amount that is not available for
dividends because it has been capitalized as a stock dividend
3. The amount must be disclosed in the consolidated financial statements, but doesn’t have
to be transferred to contributed capital
9.9 Dividends from Preacquisition Earnings
A. Bought by P as part of the acquisition, so if dividends are paid from those earnings they
decrease the investment account instead of increasing an income account
1. P’s books – cost method
To record liquidating dividend
Cash
Dividend Income (from current income)
Investment in S (from purchased income)
2. Eliminating entry – cost method
To eliminate P’s share of S’s dividends
Dividend Income
Investment in S
Dividends Declared – S
B. In subsequent years, the new investment in S (adjusted for the liquidating dividend) is used
for the eliminating entry

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9.10 Subsidiary with Both Preferred and Common Stock Outstanding

A. Determining equity interest of each class of stockholders
1. P’s control is determined by its interest in S’s voting stock. P might or might not own
shares of S’s preferred stock.
2. All classes of S’s stockholders have an interest in S’s net assets
a. S’s equity must be allocated between preferred and common interests
b. The preferred stock redemption and dividend provisions determine the amount of S’s
net assets associated with preferred – see Illustration 9-10 in your book for the details
i. Preferred gets its share of dividends before common gets earnings
ii. If there are dividends in arrears, a portion of accumulated retained earnings
belongs to preferred stockholders
B. Allocation of difference between cost of preferred stock investment and book value of
interest acquired
1. The market price of preferred stock usually ties into its dividend rate as compared to the
market returns of similar investments – much like premium or discount on bonds
2. The difference between cost and book value in the acquisition of preferred stock is
essentially the constructive retirement of the stock – it should be used to decrease
consolidated other contributed capital or consolidated retained earnings
9.11 Consolidating a Subsidiary with Preferred Stock Outstanding
A. Allocation of S’s total equity
1. Division of equity
To Preferred Stock To Common Stock
Preferred’s call price Common stock, par value
+ Dividends in arrears + Other contributed capital
= Preferred’s share of S’s total equity + Retained earnings less preferred’s
share
= Common’s share of S’s total equity
× P’s percent × P’s percent
= P’s share of preferred’s share = P’s share of common’s share

2. P’s entry
To record investment in S’s common and preferred stock
Investment in S – Preferred Stock
Investment in S – Common Stock
Cash

3. Allocation of difference between implied and book value

P’s cost of preferred stock P’s cost for common stock
- P’s share of S preferred - P’s share of S’s common stock
= Difference between implied and book value = Difference between implied and
book value

B. Consolidated statements workpaper entries – year of acquisition

To eliminate P’s investment in S’s preferred stock
Beginning Retained Earnings – S
([preferred’s share of S’s equity – pfd stock] × P’s %)
Preferred Stock – S
Difference Between Implied value and Book Value
Investment in S – Preferred Stock
Noncontrolling Interest

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Other Contributed Capital – P Company

Noncontrolling Interest
Difference Between Implied Value and
Book Value

To eliminate P’s investment in S’s common stock

Beginning Retained Earnings – S
Common Stock – S
Other Contributed Capital – S
Difference Between Implied Value and Book Value
Investment in S – Common Stock
Noncontrolling Interest

C. Complete equity method

1. Must recognize preferred dividends whether they’ve been paid or not
2. Eliminating equity for income in preferred stock
To eliminate P’s share of S’s preferred stock dividend
Equity in S Income – Preferred Stock
Investment in S – Preferred Stock

D. Accounting subsequent to the year of acquisition

1. To establish reciprocity
a. Preferred = (Pfd’s share of S’s ending RE – pfd’s share of RE at acquisition × P’s %)
b. Common = (Common’s share of S’s ending RE – remaining RE at acq. × P’s %)
2. Eliminating entries
To establish reciprocity
Investment in S – Preferred Stock
Investment in S – Common Stock
Beginning Retained Earnings – P
To eliminate intercompany dividends
Dividend Income
Dividends Declared – S (Preferred stock)
Dividends Declared – S (Common stock)
To eliminate P’s investment in S’s preferred stock
Beginning Retained Earnings – S
Preferred Stock – S
Difference Between Implied Value and Book Value
Investment in S – Preferred Stock
Noncontrolling Interest

Other Contributed Capital – P Company

Noncontrolling Interest
Difference Between Implied Value and
Book Value

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To eliminate P’s investment in S’s common stock

Beginning Retained Earnings – S
Common Stock – S
Difference Between Implied Value and Book Value
Investment in S
Noncontrolling Interest

E. Controlling interest in consolidated net income

P’s independent income
+ Other adjustments (from Chapters 5 & 6)
+ P’s share of S’s income assigned to preferred
+ P’s share of S’s income assigned to common
= Controlling interest in consolidated net income

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MULTIPLE CHOICE QUESTIONS

Choose the BEST answer for the following questions.

_____ 1. Constructive retirement is when

a. P retires shares of its own stock
b. P retires bonds payable
c. P buys S’s bonds payable
d. P buys S’s common stock

_____ 2. The price of a bond is generally determined by

a. the relation between the coupon rate and the current market rate of similar investments
b. the stated interest rate of the bond
c. how many bonds are issued
d. who buys the bonds

_____ 3. How is the consolidated statements treatment of constructive gain or loss on intercompany
bond investments different from the treatment of unrealized profit on intercompany sales of
inventory?
a. Constructive gain or loss is deferred until realized by transactions with outsiders.
b. Unrealized profit s recognized immediately, before it has been recorded.
c. Constructive gain or loss is recognized immediately, before it has been recorded.
d. There is no difference in the treatment.

_____ 4. Which of the following is NOT an acceptable technique for allocating constructive gain or
loss?
a. All to issuing company
b. All to purchasing company
c. Part to issuing company and part to purchasing company
d. All to S

_____ 5. How is constructive gain or loss divided?

a. Issuing company gets the difference between book value and purchase price
b. Issuing company gets the difference between par value and purchase price
c. Purchasing company gets the difference between book value and par value
d. Purchasing company gets the difference between par value and purchase price

_____ 6. How is constructive loss recognized by the issuing company?

a. As a deduction to discount on bonds payable
b. As an increase to discount on bonds payable
c. As a decrease to investment in bonds
d. As an increase to investment in bonds

_____ 7. How does the treatment of constructive gain or loss differ in the complete equity method
from the cost method?
a. There is no difference
b. Use the investment account instead of P’s beginning retained earnings
c. Use the equity in S income instead of interest income
d. Use the investment account instead of S’s beginning retained earnings

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 CHAPTER 9 – Intercompany Bond Holdings and Miscellaneous Topics – Consolidated Financial Statements

_____ 8. What is a note receivable discounted?

a. P sells a note it has received from S to a third party
b. P sells a note it has received from a third party to S
c. S sells a note it has received from a third party to P
d. All of these are examples of a note receivable discounted

_____ 9. What is the essence of accounting for discounted receivables on the consolidated statements?
a. They should all be eliminated
b. The consolidated balance sheet should never include a note receivable discounted
c. The consolidated balance sheet should include only notes receivable transactions with
outsiders
d. There cannot be an intercompany note receivable transaction

_____10. How does P handle a stock dividend from S?

a. With a memorandum entry only
b. With a debit to investment in S
c. With a credit to investment in S
d. With a credit to retained earnings

_____11. What is a liquidating dividend?

a. S pays dividends from income since acquisition
b. P pays dividends from consolidated income
c. S pays dividends from preacquisition income
d. P pays dividends from preacquisition income

_____12. How does S’s preferred stock affect the consolidation?

a. Any preferred stock not held by P must be included in noncontrolling interest
b. P’s % of ownership does not include preferred if the preferred doesn’t have voting rights
c. Preferred stock will share in S’s total equity
d. All of these.

_____13. If P invests in S’s preferred stock, how is the difference between Implied Value and Book
Value handled?
a. Allocated among S’s noncurrent assets
b. Allocated among P’s noncurrent assets
c. Deducted from P’s other contributed capital, with an adjustment to NCI
d. Deducted from S’s other contributed capital, with an adjustment to NCI

_____14. How is reciprocity established for preferred stock?

a. Preferred’s share of S’s ending RE – preferred’s share of RE at acq. × P’s % ownership
b. Preferred’s share of S’s ending RE – preferred’s share of RE at acq. × noncontrolling %
c. Preferred’s share of S’s ending RE – total RE at acq. × P’s % ownership
d. Preferred’s share of S’s ending RE – total RE at acq × S’s % ownership

_____15. What is the controlling interest in consolidated net income?

a. P’s independent income + P’s share of S’ total income
b. P’s independent income + other adjustments + P’s share of S’s income assigned to
preferred + P’s share of S’s income assigned to common
c. P’s independent income + other adjustments + P’s share of S’s income assigned to
preferred + P’s share of S’s total income
d. P’s independent income + other adjustments + S’s total income

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MATCHING

Match the terms in the list to the definitions below. Each term may be used only once.

A. Constructive retirement H. Preferred stock holdings

B. Constructive gain or loss I. Allocation of equity
C. Interim purchase J. Preferred’s difference between implied and book
D. Notes receivable discounted value
E. Stock dividends K. Controlling interest in income
F. Preacquisition earnings L. Cumulative preferred stock
G. Liquidating dividends

_____ 1. An equity transaction where retained earnings are transferred to contributed capital

_____ 2. P purchases S’s bonds during the middle of the fiscal year

_____ 3. A division of S’s net assets between preferred and common interests

_____ 4. If P’s bonds are bought by S, to the consolidated entity they are redeemed

_____ 5. Preference stock that might have dividends in arrears

_____ 6. Income earned by S before P bought a controlling interest

_____ 7. The portion of S’s equity in an elimination that decreases P’s other contributed capital

_____ 8. A receivable obtained either from an affiliated company or an outsider that is sold

_____ 9. The difference between the book value and the purchase price of an intercompany bond
transaction

_____10. Dividends paid from S’s earnings acquired before P bought a controlling interest

_____11. The portion of S’s income and P’s income that is attributable to P’s stockholders

_____12. The portion of S’s equity that must be allocated to preference stock

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EXERCISES

1. Pearl Company owns 90 percent of the outstanding common stock of Smokey Company. During
2012, Smokey issued $500,000 par value bonds for $520,000. They had a 10 year life and paid 6%
interest. In 2014, Pearl bought the entire bond issue on the open market for $450,000. Both
companies use the straight-line method to amortize premium or discount. The income and dividends
from both companies are listed below.

Year Pearl Company Smokey Company

Income Dividends Income Dividends
2013 $ 80,000 $40,000 $60,000 $20,000
2014 100,000 50,000 75,000 20,000

A. Compute the total gain or loss on the constructive retirement of debt

B. Allocate the total gain or loss found above between Pearl and Smokey

C. Prepare the entries that Pearl and Smokey would record in 2014
Pearl’s books -

Smokey’s books -

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2. Use the information in Exercise 1. Compute the controlling interest in consolidated net income and
noncontrolling interest in consolidated income for 2014.

3. Use the information in Exercise 1. Prepare the eliminating entries necessary to eliminate the
intercompany bond transactions for 2014.

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4. On January 1, 2014, Petunia Corporation discounted a note receivable from an outside customer to its
80 percent subsidiary, Search Company. The note was a $20,000, 10%, 180-day note, originally dated
on December 2, 2013. The discount rate was 12%.
A. Compute the proceeds to Petunia

B. Prepare the entries on Petunia’s books and on Search’s books, assuming that Petunia uses
the notes receivable discounted account
Petunia’s Books -

Search’s books -

C. Assume that Search discounted the note to a bank on February 1, 2013. The discount rate was
15%. Compute the proceeds to Search, and prepare the necessary entries on Search’s
books
Search’s books

D. Prepare the workpaper entry, if any, needed to eliminate the note

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5. Paloma Corporation has a 75% interest in its subsidiary, Sorrel Company. At the time of the
acquisition, Sorrel had 10,000 shares of $10 par value stock and $75,000 retained earnings. Paloma’s
purchase price was $150,000. Any difference between implied and book value was attributed to
goodwill. During 2014, Sorrel Company has paid no dividends since acquisition. Sorrel issued a 15%
stock dividend in 2014, when its stock was selling on the market at $20 per share. Sorrel’s retained
earnings balance at the beginning of 2014 was $100,000.

A. Prepare the journal entries on Paloma’s and Sorrel’s books for 2014 .
Paloma’s books -

Sorrel’s books -

B. Prepare the necessary workpaper entries for 2014.

C. Prepare the entries to establish reciprocity and eliminate the investment account for 2015.

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6. Pothole Corporation has an 80 percent interest in the common stock of Sunday Company. On
December 31, 2013, Sunday’s equity accounts were:
Preferred stock (10%, $100 par value, call price $105) $150,000
Common stock, $5 par value 200,000
Other contributed capital 300,000
Retained earnings 100,000
Total $750,000
Pothole acquired its interest in Sunday on January 1, 2013, for $500,000. Sunday’s retained earnings
balance on the date of acquisition was $80,000. Any difference between implied and book value is
attributable to goodwill. On the same day, Pothole acquired 50 percent of Sunday’s preferred stock,
paying $80,000.
A. Prepare the entries on Pothole’s books in 2013.

B. Prepare a schedule to allocate the equity between Sunday’s preferred and common stock
Allocation of Difference between Implied and Book Value
Account Book Value Interest
Balances Preferred Common
Preferred stock
Common stock
Other contributed capital
Retained earnings

Pothole’s percent
Book value interest acquired
Cost
Difference between I & BV
interest
* Call price + dividends in arrears – par value × number of shares
C. Prepare the eliminating entries for December 31, 2013 , assuming the preferred stock is
cumulative and nonparticipating and all preferred dividends have been paid

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SOLUTIONS

MULTIPLE CHOICE

1. C 5. D 9. C 13. C
2. A 6. A 10. A 14. A
3. C 7. B 11. C 15. B
4. D 8. D 12. D

MATCHING

1. E 4. A 7. J 10. G
2. C 5. L 8. D 11. K
3. I 6. F 9. B 12 H

EXERCISES

1. A.
Smokey’s issue price $520,000
Par value 500,000
Premium $ 20,000

Amortization of premium = 20,000/10 years = $2,000/year

Premium amortized at time of Pearl’s acquisition of bonds =
$2,000 × 2 years = $4,000

Smokey’s issue price $520,000

Less: Premium amortized 4,000
Smokey’s book value at Pearl’s acquisition $516,000
Pearl’s purchase price 450,000
Constructive gain $ 66,000

B.
To Smokey –
Book value $516,000
Par value 500,000
Smokey’s share of constructive gain $ 16,000

To Pearl –
Par value $500,000
Purchase price 450,000
Pearl’s share of constructive gain $ 50,000
C.
Pearl’s books -
To record investment in Smokey’s bonds
Investment in Smokey’s Bonds 450,000
Cash 450,000
To record interest revenue from Smokey’s bonds
Cash 30,000
Interest Revenue 30,000

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To amortize of bond discount

Investment in Smokey’s Bonds 6,250
Interest Revenue 6,250
Smokey’s books -
To record bond interest expense
Interest Expense 30,000
Cash 30,000
To record amortization of bond premium
Premium on Bonds 2,000
Interest Expense 2,000

2.
Controlling interest in Consolidated Net Income
Pearl’s reported income $100,000
Less: Dividend income (18,000)
Net income from independent operations 82,000
Add: Constructive gain not recorded 50,000
Pearl’s contribution to consolidated income 132,000
Smokey’s reported income $75,000
Add: Constructive gain not recorded 16,000
Smokey’s contribution to consolidated income 91,000
Pearl’s % × 0.9 81,900
Controlling interest in consolidated net income $213,900
Noncontrolling interest
Smokey’s contribution $91,000
Noncontrolling interest % × 0.1
Noncontrolling interest in income $ 9,100

3.
To recognize constructive gain not recorded by Pearl and adjust the bond investment to
par
Investment in Bonds 50,000
Gain on Constructive Retirement 50,000
To recognize gain not recorded by Smokey and adjust bonds payable to par
Premium on Bonds Payable 16,000
Gain on Constructive Retirement 16,000
To eliminate intercompany bonds
Bonds Payable 500,000
Investment in Bonds 500,000
To reverse amortization of Pearl’s discount
Interest Revenue 6,250
Investment in Bonds 6,250
To reverse amortization of Smokey’s premium
Interest Expense 2,000
Premium on Bonds 2,000

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Study Guide to accompany Jeter and Chaney, Advanced Accounting

4. A.
Interest = 20,000 × 10% × ½ = $1,000
Maturity value = $20,000 + $1,000 = $21,000

Discount = 21,000 × 12% × 5/6 = $2,100

Proceeds = $21,000 - $2,100 = $18,900
B.
Petunia’s Books -
To record note receivable discounted to Search
Cash 18,900
Interest Expense 1,100
Note Receivable Discounted 20,000
Search’s books -
To record note receivable purchased from Petunia
Note Receivable 21,000
Interest Income 2,100
Cash 18,900
C.
Interest = 21,000 × 15% × 1/3 = $1,050
Proceeds = $21,000 - $1,050 = $19,950
Search’s books -
To record discounting the note receivable purchased from Petunia
Cash 19,950
Interest Expense 1,050
Note Receivable Discounted 21,000

D.
To eliminate unnecessary note receivable and note receivable discounted
Note Receivable Discounted 20,000
Note Receivable 20,000
To eliminate intercompany interest income/revenue
Interest Income – Search 50
Interest Expense – Petunia 50

5. A.
Paloma’s books -
Memorandum
Subsidiary Sorrel Company has issued a 15% stock dividend, bringing Paloma’s total shares to
8,625

Sorrel’s Books
To record stock dividend
Stock Dividend Declared (or Retained Earnings - 1,500 × 30,000
$20)
Common Stock (1,500 × $10) 15,000
Other Contributed Capital (to balance) 15,000

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 CHAPTER 9 – Intercompany Bond Holdings and Miscellaneous Topics – Consolidated Financial Statements

B.
To establish reciprocity
Investment in Sorrel ([$100,000 – $75,000] × 0.75) 18,750
Beginning Retained Earnings – Paloma 18,750
To reverse effects of stock dividend
Common Stock – S ($15,000 × 0.75) 11,250
Other Contributed Capital ($15,000 × 0.75) 11,250
Stock Dividend Declared (or Retained Earnings) 22,500
To eliminate P’s investment in S
Common Stock – S 100,000
Beginning Retained Earnings – S 100,000
Difference Between Implied Value and Book Value
([$150,000/.75] – $175,000) 25,000
Investment in S ($150,000 + $18,750) 168,750
Noncontrolling Interest
($50,000 + {[$100,000 - $75,000] × 0.25}) 56,250

To allocate the difference between implied and book value

Goodwill 25,000
Difference Between Implied Value and Book Value 25,000

C.
To establish reciprocity
(S’s beginning RE – S’s RE at acquisition less stock dividend × P’s %}
(100,000 – 45,000 × 0.75)
Investment in S 41,250
Beginning Retained Earnings – P 41,250
To eliminate investment in S
Common Stock – S (100 + 30) 130,000
Beginning Retained Earnings – S 100,000
Difference Between Implied Value and Book Value 25,000
Investment in S (150 + 41.25) 191,250
Noncontrolling Interest 63,750
(50+ {[100-75] × 0.25} + [30 × 0.25])
To allocate difference between implied and book value
Land 25,000
Difference Between Implied Value and Book Value 25,000

6. A.
To record investment in Sunday’s common and preferred stock
Investment in Sunday – Common Stock 500,000
Investment in Sunday – Preferred Stock 80,000
Cash 580,000
To record preferred dividend income
Cash 7,500
Dividend Income (150 × 10% × ½) 7,500

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Study Guide to accompany Jeter and Chaney, Advanced Accounting

B.
Allocation of Difference between Implied Value and Book Value
Account Book Value Interest
Balances Preferred Common
Preferred stock $150,000 $150,000
Common stock 200,000 $200,000
Other contributed capital 300,000 300,000
Retained earnings 100,000 7,500* 92,500
$750,000
Book value 157,500 592,500
Implied value 160,000 625,000
Difference between I & BV interest $ 2,500 $ 32,500
* Call price + dividends in arrears – par value × number of shares
($105 + 0 - $100) (1,500 shares) = $7,500

C.
To eliminate intercompany dividends
Dividend Income – P 7,500
Preferred Dividend Declared – S 7,500
To eliminate P’s investment in S preferred
Beginning Retained Earnings – S 7,500
Preferred Stock – S 150,000
Difference Between Implied Value and Book Value 2,500
Investment in S – Preferred Stock 80,000
Noncontrolling Interest 80,000

Other Contributed Capital – P 1,250

Noncontrolling Interest 1,250
Difference Between Implied Value and Book Value 2,500

To eliminate investment in S common

Beginning Retained Earnings – S 92,500
Common Stock – S 200,000
Other Contributed Capital – S 300,000
Difference Between Implied Value and Book Value 32,500
Investment in S – Common Stock 500,000
Noncontrolling Interest 125,000
To allocate difference between implied and book value
Goodwill 32,500
Difference Between Implied Value and Book Value 32,500

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