how is the deferred loss calculated on problem 38? other soloutions have a different number.

ch08 Student: ___________________________________________________________________________ 1. Cutler Company owns 80 percent of the common stock of Marina Inc. Cutler acquires some of Marina's bonds from an unrelated party for less than the carrying value on Marina's books and holds them as a long-term investment. For consolidated reporting purposes, how is the acquisition of Marina's bonds treated? A. As a decrease in the Bonds Payable account on Marina's books. B. As an increase in noncurrent assets. C Everything related to the bonds is eliminated in the consolidation worksheet, and nothing related to the . bonds appears in the consolidated financial statements. D. As a retirement of bonds. 2. Culver owns 80 percent of the common stock of Fowler Company. Culver also purchases some of Fowler's bonds directly from Fowler and holds the bonds as a long-term investment. How is the acquisition of the bonds treated for consolidated reporting purposes? A. As a retirement of bonds. B. As an increase in the Bonds Payable account on Fowler's books. C Everything related to the bonds is eliminated in the consolidation worksheet, and nothing related to the . bonds appears in the consolidated financial statements. D. As an increase in noncurrent assets. 3. At the end of the year, a parent acquires a wholly owned subsidiary's bonds from unaffiliated parties at a cost less than the subsidiary's carrying value. The consolidated net income for the year of acquisition should include the parent's separate operating income plus: A. the subsidiary's net income increased by the gain on constructive retirement of debt. B. the subsidiary's net income decreased by the gain on constructive retirement of debt. C the subsidiary's net income increased by the gain on constructive retirement of debt, and decreased by . the subsidiary's bond interest expense. D the subsidiary's net income decreased by the gain on constructive retirement of debt, and decreased by . the subsidiary's bond interest expense. 4. A loss on the constructive retirement of a parent's bonds by a subsidiary is effectively recognized in the accounting records of the parent and its subsidiary: I. at the date of constructive retirement. II. over the remaining term of the bonds. A. I B. II C. Both I and II D. Neither I nor II 5. When one company purchases the debt of an affiliate from an unrelated party, a gain or loss on the constructive retirement of debt is recognized by which of the following? A. B. C. D. Option A Option B Option C Option D 6. Which of the following statements is (are) correct? I. The amount assigned to the noncontrolling interest may be affected by a constructive retirement of bonds. II. A constructive retirement of bonds normally results in an extraordinary gain or loss. III. In constructive retirement, the bonds are considered outstanding, even though they are treated as if they were retired in preparing consolidated financial statements. A. I B. II C. I and III D. I, II, and III 7. On January 1, 20X6, Nichols Corporation issued 10-year bonds at par to unrelated parties. The bonds pay interest of $15,000 every June 30 and December 31. On December 31, 20X9, Harn Corporation purchased all of Nichols' bonds in the open market at a $6,000 discount. Harn is Nichols' 80 percent owned subsidiary. Harn uses the straight line method of amortization. The consolidated income statement for the year 20X9 should report with respect to the bonds: I. interest expense of $30,000. II. an extraordinary gain of $6,000. A. I B. II C. Either I or II D. Neither I nor II Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold bonds with a par value of $300,000 at 95. Light purchased $200,000 par value of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual interest rate of 6 percent. Interest is paid semiannually on January 1 and July 1. 8. Based on the information given above, what amount of interest expense should be reported in the 20X8 consolidated income statement? A. $6,000 B. $6,500 C. $5,000 D. $10,000 9. Based on the information given above, what amount of interest receivable will be recorded by Light Corporation on December 31, 20X8, in its separate financial statements? A. $5,000 B. $6,500 C. $10,000 D. $6,000 10. Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X8 consolidated financial statements? A. $13,000 B. $13,500 C. $10,000 D. $15,000 Master Corporation owns 85 percent of Servant Corporation's voting shares. On January 1, 20X8, Master Corporation sold $200,000 par value 8 percent bonds to Servant for $245,000. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. 11. Based on the information given above, in the preparation of the 20X8 consolidated financial statements, premium on bonds payable will be: A. debited for $45,000 in the eliminating entries. B. credited for $40,500 in the eliminating entries. C. debited for $40,500 in the eliminating entries. D. credited for $45,000 in the eliminating entries. 12. Based on the information given above, in the preparation of the 20X8 consolidated financial statements, interest income will be: A. debited for $11,500 in the eliminating entries. B. credited for $11,500 in the eliminating entries. C. debited for $16,000 in the eliminating entries. D. credited for $16,000 in the eliminating entries. 13. Based on the information given above, what amount of investment in bonds will be eliminated in the preparation of the 20X8 consolidated financial statements? A. $240,500 B. $200,000 C. $245,000 D. $211,500 Moon Corporation issued $300,000 par value 10-year bonds at 107 on January 1, 20X3, which Star Corporation purchased. On July 1, 20X7, Sun Corporation purchased $120,000 of Moon bonds from Star. The bonds pay 12 percent interest annually on December 31. The preparation of consolidated financial statements for Moon and Sun at December 31, 20X9, required the following eliminating entry: 14. Based on the information given above, what percentage of the subsidiary's ownership does the parent company hold? A. 75 percent B. 65 percent C. 80 percent D. 95 percent 15. Based on the information given above, what amount did Sun pay when it purchased the bonds on July 1, 20X7? A. $118,020 B. $118,920 C. $118,620 D. $117,220 16. Based on the information given above, what amount of gain or loss on bond retirement is included in the 20X7 consolidated income statement? A. $6,600 B. $4,800 C. $6,000 D. $5,400 17. Based on the information given above, if 20X9 consolidated net income of $50,000 would have been reported without the eliminating entry provided, what amount will actually be reported? A. $47,900 B. $48,200 C. $49,400 D. $48,800 ABC, a holder of a $400,000 XYZ Inc. bond, collected the interest due on June 30, 20X8, and then sold the bond to DEF Inc. for $365,000. On that date, XYZ, a 90 percent owner of DEF, had a $450,000 carrying amount for this bond. 18. Based on the information given above, what amount of gain or loss on bond retirement was recorded? A. No gain or loss B. $85,000 gain C. $85,000 loss D. $35,000 loss 19. Based on the information given above, what was the effect of DEF's purchase of XYZ's bond on the noncontrolling interest amount reported in XYZ's June 30, 20X8, consolidated balance sheet? A. No effect B. $35,000 increase C. $8,500 decrease D. $8,500 increase Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. 20. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X8 consolidated financial statements? A. $3,500 B. $2,800 C. $5,000 D. $2,500 21. Based on the information given above, what amount of gain or loss on bond retirement will be reported in the 20X8 consolidated financial statements? A. $17,000 loss B. $12,800 loss C. $18,500 gain D. $22,200 gain 22. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X9 consolidated financial statements? A. $3,500 B. $2,800 C. $5,000 D. $2,500 23. Based on the information given above, what amount of interest income will be eliminated in the preparation of the 20X9 consolidated financial statements? A. $17,000 B. $13,300 C. $18,500 D. $22,200 24. Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X9 consolidated financial statements? A. $17,000 B. $13,300 C. $18,500 D. $22,200 25. Based on the information given above, what amount of constructive gain will be allocated to noncontrolling interest in 20X8 consolidated financial statements? A. $4,925 B. $5,550 C. $5,625 D. $4,625 Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite's voting common stock. 26. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X8 year-end consolidated financial statements? A. $3,500 B. $2,800 C. $5,000 D. $2,500 27. Based on the information given above, what amount of gain or loss on bond retirement will be reported in the 20X8 consolidated financial statements? A. $17,000 B. $12,800 C. $18,500 D. $22,200 28. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X9 year-end consolidated financial statements? A. $3,500 B. $2,800 C. $5,000 D. $2,500 29. Based on the information given above, what amount of interest income will be eliminated in the preparation of the 20X9 consolidated financial statements? A. $17,000 B. $13,300 C. $18,500 D. $22,200 Hunter Corporation holds 80 percent of the voting shares of Moss Company. On January 1, 20X8, Moss purchased $100,000 par value 12 percent first mortgage bonds of Hunter from Cruse for $115,000. Hunter originally issued the bonds to Cruse on January 1, 20X6, for $110,000. The bonds have an 8year maturity from the date of issue. Moss reported net income of $65,000 for 20X8, and Hunter reported income (excluding income from ownership of Moss's stock) of $90,000. 30. Based on the information given above, what amount of interest expense does Hunter record annually? A. $10,750 B. $9,500 C. $2,500 D. $12,000 31. Based on the information given above, what amount of interest income does Moss record for 20X8? A. $12,000 B. $2,500 C. $7,500 D. $9,500 32. Based on the information given above, what gain or loss on the retirement of bonds should be reported in the 20X8 consolidated income statement? A. $6,250 gain B. $7,500 gain C. $7,500 loss D. $6,250 loss 33. Based on the information given above, what amount of consolidated net income should be reported for 20X8? A. $163,750 B. $161,250 C. $146,250 D. $148,750 Senior Corporation acquired 80 percent of Junior Company's voting shares on January 1, 20X8, at underlying book value. On that date, it also purchased $500,000 par value 8 percent Junior bonds, which had been issued on January 1, 20X5, with a 12-year maturity. During preparation of the consolidated financial statements for December 31, 20X8, the following eliminating entry was made in the worksheet: 34. Based on the information given above, what price did Senior pay to purchase the Junior bonds? A. $530,000 B. $516,875 C. $533,750 D. $550,625 35. Based on the information given above, what was the carrying amount of the bonds on Junior's books on the date of purchase? A. $533,750 B. $516,875 C. $545,000 D. $550,625 36. A subsidiary issues bonds. The parent can then acquire the bonds either directly from the subsidiary or from a nonaffiliate that had originally acquired the subsidiary's bonds. Required: a) Discuss the parent's accounting as it relates to the preparation of consolidated financial statements, for their acquisition of the bonds: 1. from the nonaffiliate. 2. directly from the subsidiary. b) Why does it matter who the bonds are acquired from? 37. Dundee Company issued $1,000,000 par value 10-year bonds at 102 on January 1, 20X5, which Mega Corporation purchased. The coupon rate on the bonds is 9 percent. Interest payments are made semiannually on July 1 and January 1. On July 1, 20X8, Perth Company purchased $500,000 par value of the bonds from Mega for $492,200. Perth owns 65 percent of Dundee's voting shares. Required: a. What amount of gain or loss will be reported in Dundee's 20X8 income statement on the retirement of bonds? b. Will a gain or loss be reported in the 20X8 consolidated financial statements for Perth for the constructive retirement of bonds? What amount will be reported? c. How much will Perth's purchase of the bonds change consolidated net income for 20X8? d. Prepare the worksheet eliminating entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X8. e. Prepare the worksheet eliminating entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X9. 38. On January 1, 20X7, Gild Company acquired 60 percent of the outstanding common stock of Leeds Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Leeds. At the time of purchase, Leeds had common stock of $1,000,000 outstanding and retained earnings of $800,000. On December 31, 20X7, Gild purchased 50 percent of Leeds' bonds outstanding which were originally issued on January 2, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized on a straight-line basis. Gild paid $306,000 for its investment in Leeds' bonds and intends to hold the bonds until maturity. Income and dividends for Gild and Leeds for 20X7 and 20X8 are as follows: Assume Gild accounts for its investment in Leeds stock using the fully adjusted equity method. Required: A) Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X7. B) Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X8. 39. On January 1, 20X7, Gild Company acquired 60 percent of the outstanding common stock of Leeds Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Leeds. At the time of purchase, Leeds had common stock of $1,000,000 outstanding and retained earnings of $800,000. On December 31, 20X7, Gild purchased 50 percent of Leeds' bonds outstanding which were originally issued on January 2, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized on a straight-line basis. Gild paid $306,000 for its investment in Leeds' bonds and intends to hold the bonds until maturity. Income and dividends for Gild and Leeds for 20X7 and 20X8 are as follows: Assume Gild accounts for its investment in Leeds stock using the modified equity method. Required: A) Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X7. B) Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X8. 40. On January 1, 20X7, Gild Company acquired 60 percent of the outstanding common stock of Leeds Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Leeds. At the time of purchase, Leeds had common stock of $1,000,000 outstanding and retained earnings of $800,000. On December 31, 20X7, Gild purchased 50 percent of Leeds' bonds outstanding which were originally issued on January 2, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized on a straight-line basis. Gild paid $306,000 for its investment in Leeds' bonds and intends to hold the bonds until maturity. Income and dividends for Gild and Leeds for 20X7 and 20X8 are as follows: Assume Gild accounts for its investment in Leeds stock using the cost method. Required: A) Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X7. B) Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X8. ch08 Key 1. D 2. C 3. A 4. B 5. A 6. A 7. A 8. B 9. D 10. A 11. C 12. A 13. A 14. B 15. A 16. A 17. D 18. B 19. A 20. A 21. C 22. B 23. A 24. B 25. D 26. A 27. D 28. B 29. A 30. A 31. D 32. C 33. D 34. D 35. A b) When a parent acquires a subsidiary's debt it is important to know if the acquisition is direct or indirect. In case of direct intercompany debt transfer, there is no impact on consolidated financial statements. However, if the parent has to go outside the consolidated entity i.e. in case of indirect intercompany debt transfer, the impact of the transaction on the consolidated entity must be reported. 2. When the parent purchases the bonds directly from the subsidiary the transaction is viewed as an inter-company debt and must be eliminated in the preparation of the consolidated financial statements. 36. a) 1. When the parent acquires the bonds from a nonaffiliate, the bonds were originally held outside the consolidated entity and the bonds must be treated as if they were reacquired by the original issuer. In this case the bond acquisition is handled as a constructive retirement, which means the bonds are treated as if the subsidiary had retired the bonds when the consolidated financial statements are prepared. Any gain or loss on constructive retirement should be reported in the consolidated income statement but not in separate financial statements of the parent and subsidiary. e. Eliminating entries, December 31, 20X9 d. Eliminating entries, December 31, 20X8 c. Consolidated net income for 20X8 will increase by $13,200: b. A gain of $14,300 will be reported: 37. a. No gain or loss will be reported by Dundee b. 38. a. b. 39. a. b. 40. a. ch08 Summary Category # of Questions AACSB: Analytic 34 AACSB: Communication 1 AACSB: Reflective Thinking 5 Baker - Chapter 08 48 Blooms: Apply 17 Blooms: Remember 5 Blooms: Understand 18 Difficulty: 1 Easy 5 Difficulty: 2 Medium 18 Difficulty: 3 Hard 17 Learning Objective: 08-01 Understand and explain concepts associated with intercompany debt transfers. 8 Learning Objective: 08-02 Prepare journal entries and elimination entries related to direct intercompany debt transfers. 6 Learning Objective: 0817 03 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount less than book value. Learning Objective: 089 04 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount more than book value