10 - 0 advanced accounting by debra jeter and paul chaney chapter 10: consolidated financial...
TRANSCRIPT
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Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 10: Consolidated
Financial Statements -
Miscellaneous Topics
Slides Authored by Hannah Wong, Ph.D.Rutgers University
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Intercompany Bold Holdings
Bonds acquired by an affiliate are no longer held by external parties
In the consolidated financial statements: the bonds are viewed as being
constructively retired record a gain or loss on this early
retirement of debt
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Allocation of Constructive Gain/Loss
Entirely to the issuing company Entirely to the purchasing company Entirely to the parent company 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.
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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
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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
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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
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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 bonds 12,000
Discount on bonds payable 12,000
(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
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Accounting for Intercompany Bonds
Bonds payable 300,000
Investment in S Bonds 300,000
To eliminate intercompany bond investment and liability
Year of Intercompany Bond Purchase - EE’s
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Intercompany Bonds Cost and Partial Equity Methods
Beginning retained earnings- P 10,000
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- P 9,600
Beginning retained earnings- S 2,400
Discount on bonds payable 12,000
(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
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Intercompany Bonds Cost and Partial Equity Methods
Investment in S Bonds 2,500
Interest revenue 2,500
To reverse amortization of discount recorded by S in the current year
Discount on bonds payable 3,000
Interest expense 3,000
To reverse amortization of premium recorded by P in the current year
Year After Intercompany Bond Purchase - EE’s
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Intercompany Bonds Cost and Partial Equity Methods
Year After Intercompany Bond Purchase - EE’s
Bonds payable 300,000
Investment in S Bonds 300,000
To eliminate intercompany bond investment and liability
Interest revenue 27,000
Interest expense27,000
To eliminate intercompany bond interest
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Intercompany Bonds Complete Equity Method
Investment in S 19,600
Beginning retained earnings- S 2,400
Discount on bonds payable 12,000
Investment in S Bonds 10,000
(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
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Intercompany Bonds Complete Equity Method
Investment in S Bonds 2,500
Interest revenue 2,500
To reverse amortization of discount recorded by S in the current year
Discount on bonds payable 3,000
Interest expense 3,000
To reverse amortization of premium recorded by P in the current year
Year After Intercompany Bond Purchase - EE’s
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Intercompany Bonds Complete Equity Method
Year After Intercompany Bond Purchase - EE’s
Bonds payable 300,000
Investment in S Bonds 300,000
To eliminate intercompany bond investment and liability
Interest revenue 27,000
Interest expense27,000
To eliminate intercompany bond interest
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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%
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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%
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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 discountedCr Notes receivable
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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 discountedCr Notes receivable
Receives note from third
party
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Stock Dividend from SubsidiaryJournal Entries
Stock dividend declared (or R/E) 150,000
Capital stock 150,000
Subsidiary
Parent
Memorandum entry only.
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Stock Dividend from SubsidiaryEliminating Entries
Capital stock 150,000
Stock dividend declared (or R/E) 150,000
Year of stock dividend
To reverse the subsidiary’s JE on stock dividend
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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
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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
Noncontrollinginterest
Controllinginterest
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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
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Advanced Accounting
by
Debra Jeter and Paul Chaney
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