Steinberger Company issued 10-year, 8% bonds with a par value of $1,000,000 on January 2, 2009, for $1,040,000. Interest is payable semiannually on June 30 and December 31. On December 31, 2010, Potts Company purchased $700,000 of Steinberger par value bonds for $670,000. Steinberger is an 80% owned subsidiary of Potts. Both companies use the straight-line method to amortize bond discounts and premiums. Steinberger declared cash dividends of $100,000 in 2010 and reported net income of $220,000 for the year. Potts reported net income of $350,000 for 2010 and paid dividends of $160,000 during 2010. Required: A. Compute the total gain or loss on the constructive retirement of the debt. B. Allocate the total gain or loss between Steinberger Company and Potts Company. C. Compute the controlling interest in consolidated net income for 2010. D. Prepare in general journal form the intercompany bond elimination entries for the consolidated statements workpaper prepared on December 31, 2010. 9-3 Prentice Company, who owns an 80% interest in Steffey Company, purchased $2,000,000 of Steffey's 8% bonds at 106 on December 31, 2010. The bonds pay interest on January 1 and July 1 and mature on December 31, 2013. Prentice Company uses the cost method to account for its investment in Steffey. Selected balances from December 31, 2010 accounts of the two companies are as follows: Prentice _____Steffey____ Investment in Steffey 8% bonds $2,120,000 $ ---- Bond discount ---- 300,000 Interest payable ---- 800,000 8% bonds payable ---- 20,000,000 Interest expense ---- 1,700,000 Gain or loss on constructive retirement of bonds ---- ---- Required: Prepare in general journal form the workpaper eliminations related to the bonds to consolidated the financial statements of Prentice and its subsidiary for the year ended December 31, 2010 and 2011. 9-4 On January 1, 2010, Powell Company purchased 80% of the common stock of Southern Company for $400,000. Southern Company reported common stock of $200,000 ($10 par value), other contributed capital of $60,000, and retained earnings of $120,000 on this date. The difference between implied value and the book value interest acquired is attributable to the under-valuation of land held by Southern Company. Southern Company reported net income for 2010 of $100,000. During 2010 Southern Company declared and paid a 20% stock dividend and a $24,000 cash dividend. Southern Company stock had a market value of $30 per share on the date the stock dividend was declared. Powell Company uses the cost method to account for its investment in Southern Company. Required: A. Prepare the journal entries required in the books of Powell Company to account for the investment in Southern Company. B. Prepare in general journal form the workpaper entries necessary in the consolidated statements workpaper for the year ended December 31, 2010. C. Prepare the workpaper entry to establish reciprocity in the 2011 consolidated statements workpaper. Use the following information to answer Questions 8, 9, and 10. Pollard Corporation owns 90% of the outstanding common stock of Steele Company. On January 1, 2008, Steele Company issued $500,000, 12%, ten-year bonds. On January 1, 2010, Pollard Corporation paid $412,000 for Steele Company bonds with a par value of $400,000 and a carrying value of $393,600. Both companies use the straight-line method to amortize bond premiums and discounts. Pollard Corporation accounts for the investment using the cost method of accounting. 8. The total gain or loss on the constructive retirement of the debt to be reported in the 2010 consolidated income statement is a. $12,000 loss. b. $12,000 gain. c. $18,400 loss. d. $18,400 gain. e. $6,400 loss. 9. Pollard Corporation would report a balance in the Investment in Steele Company Bonds account on December 31, 2010, of a. $412,000. b. $393,600. c. $410,500. d. $400,000. e. none of these. 10. Compute the noncontrolling interest in the 2010 consolidated income assuming that Pollard Corporation reported a net income of $300,000 (includes dividend income from Steele Company). Steele Company reported net income of $180,000 and declared and paid cash dividends of $100,000. a. $18,000 b. $17,440 c. $17,360 d. $18,560 e. none of these. 11. Sousa Corporation is an 80% owned subsidiary of Phillips Company. Sousa purchased bonds of Phillips Company for $103,000. Phillips Company reported the bond liability on the date of purchase at $100,000 less unamortized discount of $5,000. Assuming that the constructive gain or loss is material, the consolidated income statement should report an a. ordinary loss of $8,000. b. ordinary gain of $8,000. c. extraordinary loss of $8,000 adjusted for income tax effects. d. extraordinary gain of $8,000 adjusted for income tax effects. 12. From a consolidated entity point of view, the constructive gain or loss on the open market purchase of a parent company's bonds by a subsidiary company is a. considered realized at the date of the open market purchase. b. realized in future periods through discount and premium amortization on the books of the individual companies. c. realized only to the extent of the parent company's interest in the subsidiary. d. deferred and recognized in the consolidated income statement when the bonds are retired. 13. Stage Company is a 90% owned subsidiary of Princeton Company. On January 1, 2010, Stage Company purchased for $680,000 bonds of Princeton Company that had a carrying value of $725,000 (par value $700,000). The bonds mature on December 31, 2014. Both companies use the straight-line method of amortization and have a December 31 year-end. The increase in 2010 consolidated income (i.e., income before subtracting noncontrolling interest) is a. $45,000. b. $44,000. c. $54,000. d. $36,000. e. $46,000. Use the following information to answer Questions 14 and 15. Parkes Company acquired 90% of Stanton Company's common stock for $780,000 and 40% of its preferred stock for $180,000. On January 1, 2010, the date of acquisition, the companies reported the following account balances: Parkes Company Stanton Company Preferred stock, $100 par value $ 500,000 $ 360,000 Common stock, $10 par value 1,200,000 600,000 Other contributed capital 190,000 140,000 Retained earnings 210,000 110,000 Total stockholders' equity $2,100,000 $1,200,000 The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value equal to 104% of par value. Dividends were not paid during 2009. During 2010, Stanton Company reported net income of $120,000 and declared and paid cash dividends in the amount of $70,000. 14. The difference between the implied value of the preferred stock and its book value is a. $40,000. b. $39,600. c. $34,400. d. $26,000. e. 15,840. 15. Noncontrolling interest in the 2010 reported net income of Stanton Company is a. $29,500. b. $12,000. c. $34,000. d. $21,000. e. $30,000. 16. Constructive gains and losses from intercompany bond transactions are: a. treated as extraordinary items on the consolidated income statement b. included as other revenues and expenses on the consolidated income statement. c. excluded from the consolidated income statement until realized. d. eliminated from the consolidated income statement. 17. Pittsford Company purchased bonds from Shay Company on the open market at a premium. Shay Company is a 100% owned subsidiary of Pittsford Company. Pittsford intends to hold the bonds until maturity. In a consolidated balance sheet, the difference between the bond carrying values in the two companies would be: a. included as a decrease to retained earnings. b. included as an increase to retained earnings. c. reported as a deferred debit to be amortized over the remaining life of the bonds. d. reported as a deferred credit to be amortized over the remaining life of the bonds. 18. On January 1, 2010, Plueger Company has $700,000 of 6%, 10-year bonds with an unamortized discount of $28,000. Steiner Company, an 80% subsidiary, purchased $350,000 of these bonds at 102. The gain or (loss) on the retirement of Plueger's bonds is: a. $14,000 loss. b. $14,000 gain. c. $21,000 loss. d. $21,000 gain. 19. On a consolidated balance sheet, subsidiary preferred stock will be shown: a. as part of consolidated stockholder's equity. b. combined with any preferred stock of the parent. c. as part of the noncontrolling interest amount to the extent such balance represents preferred stock held by the parent. d. as part of the noncontrolling interest amount to the extent such balance represents preferred stock held by outside interests. 20. Pettijohn Company has total stockholders' equity of $2,000,000 consisting of $400,000 of $1 par value common stock, $400,000 of other contributed capital, and $1,200,000 of retained earnings. Pettijohn owns 80% of Spencer Company purchased at book value. Spencer has $800,000 of 5% cumulative preferred stock outstanding. Pettijohn acquired 40% of the preferred stock of Spencer for $200,000. After this transaction the balances in Pettijohn's retained earnings and other contributed capital accounts are: a. $1,200,000 and $400,000. b. $1,200,000 and $520,000. c. $1,320,000 and $400,000. d. $1,080,000 and $400,000. 10-1 On January 1, 2011, Bargain Mart owed City Bank $1,600,000, under an 8% note with three years remaining to maturity. Due to financial difficulties, Bargain Mart was unable to pay the previous year's interest. City Bank agreed to settle Bargain Mart's debt in exchange for land having a fair market value of $1,310,000. Bargain Mart purchased the land in 2003 for $1,000,000. Required: Prepare the journal entries to record the restructuring of the debt by Bargain Mart. 10-2 On January 1, 2010, Gannon, Inc. owed BancCorp $12 million on a 10% note due December 31, 2011. Interest was last paid on December 31, 2008. Gannon was experiencing severe financial difficulties and asked BancCorp to modify the terms of the debt agreement. After negotiation BancCorp agreed to: - Forgive the interest accrued for the year just ended, - Reduce the remaining two years interest payments to $900,000 each and delay the first payment until December 31, 2011, and - Reduce the unpaid principal amount to $9,600,000. Required: Prepare the journal entries for Gannon, Inc. necessitated by the restructuring of the debt at (1) January 1, 2010, (2) December 31, 2011, and (3) December 31, 2012. 10-3 On January 2, 2011 Stevens, Inc. was indebted to First Bank under a $12 million, 10% unsecured note. The note was signed January 2, 2005, and was due December 31, 2014. Annual interest was last paid on December 31, 2009. Stevens negotiated a restructuring of the terms of the debt agreement due to financial difficulties. Required: Prepare all journal entries for Stevens, Inc. to record the restructuring and any remaining transactions relating to the debt under each independent assumption. A. First Bank agreed to settle the debt in exchange for land which cost Stevens $8,500,000 and has a fair market value of $10,000,000. B. First Bank agreed to (1) forgive the accrued interest from last year (2) reduce the remaining four interest payments to $600,000 each, and (3) reduce the principal to $9,000,000. 10-4 On December 31, 2011, Community Bank agreed to restructure a $900,000, 8% loan receivable from Neer Corporation because of Neer's financial problems. At December 31 there was $36,000 of accrued interest for a six-month period. Terms of the restructuring agreement are as follows: - Reduce the loan from $900,000 to $600,000; - Extend the maturity date by 2 years from December 31, 2011 to December 31, 2013; - Reduce the interest rate on the loan from 8% to 6%. Present value assumptions: Present value of $1 for 2 years at 6% = 0.8900 Present value of $1 for 2 years at 8% = 0.8573 Present value of an ordinary annuity of $1 for 2 years at 6% = 1.8334 Present value of an ordinary annuity of $1 for 2 years at 8% = 1.7833 Required: Compute the gain or loss that will be reported by Community Bank. 1. A corporation that is unable to pay its debts as they become due is: a. bankrupt. b. overdrawn. c. insolvent. d. liquidating. 2. When a business becomes insolvent, it generally has three possible courses of action. Which of the following is not one of the three possible courses of action? a. The debtor and its creditors may enter into a contractual agreement, outside of formal bankruptcy proceedings. b. The debtor continues operating the business in the normal course of the day-to-day operations. c. The debtor or its creditors may file a bankruptcy petition, after which the debtor is liquidated under Chapter 7. d. The debtor or its creditors may file a petition for reorganization under Chapter 11. 3. Assets transferred by the debtor to a creditor to settle a debt are transferred at: a. book value of the debt. b. book value of the transferred assets. c. fair market value of the debt. d. fair market value of the transferred assets. 4. A composition agreement is an agreement between the debtor and its creditors whereby the creditors agree to: a. accept less than the full amount of their claims. b. delay settlement of the claim until a latter date. c. force the debtor into a liquidation. d. accrue interest at a higher rate. 5. In a troubled debt restructuring involving a modification of terms, the debtor's gain on restructuring: a. will equal the creditor's gain on restructuring. b. will equal the creditor's loss on restructuring. c. may not equal the creditor's gain on restructuring. d. may not equal the creditor's loss on restructuring. 6. A bankruptcy petition filed by a firm is a: a. chapter petition. b. involuntary petition. c. voluntary petition. d. chapter 11 petition. 7. When a bankruptcy court enters an "order for relief" it has: a. accepted the petition. b. dismissed the petition. c. appointed a trustee. d. started legal action against the debtor by its creditors.