Slide
9-1
9
Intercompany
Bond Holdings and
Miscellaneous Topics—
Consolidated Financial
Statements
Advanced Accounting, Fourth Edition
Slide
9-2
Learning Objectives
Slide
9-3
1.
Describe the term “constructive retirement of debt.”
2.
Describe how the gain or loss on constructive retirement of
intercompany bond holdings is allocated between the
purchasing and issuing companies.
3.
Explain the impact on the consolidated financial statements
when a company issues a note to an affiliated company, which
then discounts the note with an outside company.
4.
Determine the effect on the consolidated financial statements
when a subsidiary issues a stock dividend.
5.
Understand the difference in how stock dividends and cash
dividends issued by a subsidiary company affect the
consolidated financial statements.
Learning Objectives
Slide
9-4
5.
Determine the impact on the investment account when a
subsidiary issues a stock dividend from preacquisition earnings
and from postacquisition earnings.
6.
Explain how the purchase price is allocated when the
subsidiary has both common and preferred stock outstanding.
7.
Determine the controlling interest in income when the parent
company owns both common and preferred stock of the
subsidiary.
Intercompany Bond Holdings
An affiliate company may purchase bonds issued by another
affiliate.
Intercompany
bond investments (receivable),
bonds payable (liability),
intercompany interest expense and,
Intercompany interest revenue,
must be eliminated.
Bonds not held by external parties are viewed as being
constructively retired in the consolidated financial
statements. This is viewed as early retirement of debt.
Slide
9-5
LO 1 Constructive retirement of debt.
Accounting for Bonds - A Review
Illustration: Three year bonds with a par value of
$100,000 are issued on Jan. 2, 2010, for $85,000. The
bonds pay 7% interest each December 31. Assume straightline amortization of the discount.
Date
7%
Discount
Interest Amortized
1/1/10
Carrying
Amount
$ 85,000
12/31/10
$ 7,000
$ 5,000 *
90,000
12/31/11
7,000
5,000
95,000
12/31/12
7,000
5,000
100,000
* $100,000 – 85,000 = 15,000 / 3 years = $5,000
Slide
9-6
LO 1 Constructive retirement of debt.
Accounting for Bonds - A Review
Illustration - Issuing Company.
Journal entries for 2010:
Jan. 2
Dec. 31
Slide
9-7
Cash
Discount on bonds payable
Bonds payable
85,000
15,000
Interest expense
Cash
7,000
Interest expense
Discount on bonds payable
5,000
100,000
7,000
5,000
LO 1 Constructive retirement of debt.
Accounting for Bonds - A Review
Illustration - Investor Company.
Journal entries for 2010:
Jan. 2
Dec. 31
Slide
9-8
Investment in bonds
Cash
85,000
Cash
Interest revenue
7,000
Investment in bonds
Interest revenue
5,000
85,000
7,000
5,000
LO 1 Constructive retirement of debt.
Constructive Gain or Loss on Intercompany
Bond Holdings
The acquisition of affiliate’s outstanding bonds from outsiders
is considered a constructive retirement by the consolidated
entity.
The constructive gain or loss is recognized in the consolidated
income statement prior to the recognition of the gain or loss on
the books of the individual companies.
In the period the bonds are purchased, workpaper entries are
made to accelerate the recognition of the gain or loss. After
the bonds are purchased, workpaper entries are needed to
eliminate the portion of the gain or loss recorded during the
period on the books of the individual companies.
Slide
9-9
LO 1 Constructive retirement of debt.
Constructive Gain or Loss
Allocation of Constructive Gain or Loss
Four methods for allocating the constructive gain or loss
between the parent and subsidiary:
1.
Entirely to the issuing company.
2. Entirely to the purchasing company.
3. Entirely to the parent company.
4. Between the purchasing and issuing companies.
The authors consider the fourth method
to be the soundest conceptually.
Slide
9-10
LO 2 Allocating the constructive gain or loss.
Constructive Gain or Loss
Computing the Constructive Gain or Loss
On the date bonds of an affiliate are purchased, a
constructive gain or loss is computed.
The portion allocated to the issuing company is the
difference between the book value (carrying value) of the
bonds issued and their par value;
The portion allocated to the purchasing company is the
difference between the par value of the bonds and their
cost.
There is no constructive gain or loss if the bonds are issued
or purchased at par value.
Slide
9-11
LO 2 Allocating the constructive gain or loss.
Constructive Gain or Loss
Computing the Constructive Gain or Loss
If the issue price and purchase price were not equal to par
value, there are four possible combinations that can result:
1.
2.
3.
4.
Slide
9-12
Issuing Co.
Book Value
$ 110,000
90,000
110,000
90,000
>
<
>
<
Par Value
$ 100,000
100,000
100,000
100,000
>
<
<
>
Purchasing Co.
Purchase Price
$
85,000
115,000
115,000
85,000
LO 2 Allocating the constructive gain or loss.
Constructive Gain or Loss
Computing the Constructive Gain or Loss
Issuing Co.
Book Value
3.
110,000
>
Par Value
100,000
+ $10,000
Constructive gain
<
Purchasing Co.
Purchase Price
115,000
- $15,000
Constructive loss
- $5,000
Net constructive loss
Slide
9-13
LO 2 Allocating the constructive gain or loss.
Constructive Gain or Loss
Computing the Constructive Gain or Loss
Issuing Co.
Book Value
4.
90,000
>
Par Value
100,000
- $10,000
Constructive loss
<
Purchasing Co.
Purchase Price
85,000
+ $15,000
Constructive gain
+ $5,000
Net constructive gain
Slide
9-14
LO 2 Allocating the constructive gain or loss.
Accounting for Intercompany Bonds Illustrated
Illustration: P Company acquired an 80% interest in S Company
for $1,200,000 on January 2, 2009, when the retained earnings
and common stock accounts of S Company were $500,000 and
$1,000,000, respectively. On December 31, 2012, P Company
acquired $300,000 of S Company’s par value bonds (60% of S
Company’s bonds) on the open market for $310,000 after the
semiannual interest payment had been made. At the time of
purchase there were $500,000 par value bonds outstanding with a
book value of $480,000. The bonds mature in four years on
December 31, 2016, and carry an interest rate of 9%. Interest is
paid semiannually on June 30 and December 31. Both companies
use the straight-line method to amortize bond discounts and
premiums. The fiscal year-end of both companies is December 31.
Slide
9-15
LO 2 Allocating the constructive gain or loss.
Book Entry Related to Bond Investment
Prepare the entry made by P Company to record the bond
investment:
Dec. 31 Investment in S Company Bonds
Cash
310,000
310,000
Note:
Slide
9-16

The usual practice of recording a bond investment does not
separate the discount or premium.

Since the bonds were purchased on the open market, there is
no entry made on the issuing company’s books.
LO 2 Allocating the constructive gain or loss.
Book Entry Related to Bond Investment
Compute the Constructive Gain or Loss
S Company
Book Value
288,000
>
Par Value
300,000
- $12,000
Constructive loss
On the books of the
individual companies,
the constructive loss
is not recorded.
Slide
9-17
<
P Company
Purchase Price
310,000
- $10,000
Constructive loss
- $22,000
Net constructive loss
The constructive loss
is recognized in the
determination of
consolidated income.
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper—2012
Income Statement
Sales
Dividend income
Total revenue
Cost of goods sold
Interest expense
Other expenses
Loss on constructive
retirement of bonds
Total cost and expense
Net income
Noncontrolling interest
Net income
Retained Earnings Statement
Retained earnings, 1/1
Net income
Dividends declared
Retained earnings, 12/31
Balance Sheet
Investment in S Co. bonds
Investment in S. Co. stock
Other assets
Total assets
9% bonds payable
Discount on bonds payable
Other liabilities
Capital stock
Retained earnings
NCI in net assets 1/1
NCI in net assets 12/31
Slide Total liab. & equity
9-18
P
Company
3,104,000
16,000
3,120,000
1,700,000
S
Company
2,200,000
1,124,000
2,200,000
1,360,000
50,000
665,000
2,824,000
296,000
2,075,000
125,000
296,000
125,000
1,650,000
296,000
(150,000)
1,796,000
700,000
125,000
(20,000)
805,000
Eliminations
Debit
Credit
16,000 (5)
10,000 (2)
12,000 (3)
38,000
700,000 (6)
38,000
738,000
310,000
1,200,000
5,420,000
6,930,000
NCI
160,000 (1)
2,134,000
3,000,000
1,796,000
2,620,000
2,620,000
500,000
(20,000)
335,000
1,000,000
805,000
1,000,000 (6)
738,000
6,930,000
2,620,000
2,198,000
160,000 (1)
16,000 (5)
176,000
22,600
22,600
22,000
4,921,000
383,000
(22,600)
360,400
22,600
(4,000)
18,600
1,810,000
360,400
(150,000)
2,020,400
10,000 (2)
300,000 (4)
1,360,000 (6)
300,000 (4)
12,000
176,000
18,600
340,000 (6) 340,000
358,600
2,198,000
Consolidated
Balances
5,304,000
5,304,000
3,060,000
50,000
1,789,000
8,040,000
8,040,000
200,000
(8,000)
2,469,000
3,000,000
2,020,400
358,600
8,040,000
Consolidated Statements Workpaper—2012
Income Statement
Sales
Dividend income
Total revenue
Cost of goods sold
Interest expense
Other expenses
Loss on constructive
retirement of bonds
Total cost and expense
Net income
Noncontrolling interest
Net income
P
Company
3,104,000
16,000
3,120,000
1,700,000
1,124,000
2,824,000
296,000
296,000
Retained Earnings Statement
Retained earnings, 1/1
1,650,000
Net income
296,000
Dividends declared
(150,000)
Retained earnings, 12/31
1,796,000
S
Company
2,200,000
Eliminations
Debit
Credit
16,000
(5)
10,000
12,000
(2)
NCI
2,200,000
1,360,000
50,000
665,000
(3)
22,600 *
22,600
22,000
4,921,000
383,000
(22,600)
360,400
22,600
(4,000)
18,600
1,810,000
360,400
(150,000)
2,020,400
2,075,000
125,000
125,000
38,000
700,000
125,000
(20,000)
805,000
700,000
38,000
738,000
-
(6)
160,000
16,000
176,000
(1)
(5)
Consolidated
Balances
5,304,000
5,304,000
3,060,000
50,000
1,789,000
* ($125,000 $12,000) x 20% = $22,600
Slide
9-19
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper—2012
P
Balance Sheet
Company
Investment in S Co. bonds
310,000
Investment in S. Co. stock
Other assets
Total assets
9% bonds payable
Discount on bonds payable
Other liabilities
Capital stock
Retained earnings
NCI in net assets 1/1 **
NCI in net assets 12/31
Total liab. & equity
1,200,000
5,420,000
6,930,000
2,134,000
3,000,000
1,796,000
6,930,000
S
Company
2,620,000
2,620,000
500,000
(20,000)
335,000
1,000,000
805,000
2,620,000
Eliminations
Debit
Credit
10,000
300,000
160,000 (1) 1,360,000
300,000
2,198,000
(2)
(4)
(6)
(4)
12,000
1,000,000
738,000
NCI
(3)
(6)
176,000
340,000
2,198,000
Consolidated
Balances
-
(6)
18,600
340,000
358,600
8,040,000
8,040,000
200,000
(8,000)
2,469,000
3,000,000
2,020,400
358,600
8,040,000
** $300,000 ($700,000 - $500,000) x 20% = $340,000
Slide
9-20
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper—2012
Worksheet entries for 2012.
1.
Investment in S Company Stock
Beginning Retained Earnings—P Company
160,000
160,000
To establish reciprocity, or convert to equity
Retained earnings balance—January 1, 2012
Retained earnings balance—date of acquisition
500,000
Increase in retained earnings
200,000
Percentage interest held by P Company
Amount to establish reciprocity
Slide
9-21
$ 700,000
80%
$ 160,000
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper—2012
Worksheet entries for 2012.
2. Loss on Constructive Retirement of Bonds
Investment in S Company Bonds
10,000
10,000
To recognize the constructive loss not recorded by P Company
and adjust the bond investment to par value.
3. Loss on Constructive Retirement of Bonds
Discount on Bonds Payable
12,000
12,000
To recognize the constructive loss not recorded by the subsidiary and
adjust the intercompany bonds to par value.
Entries (2) and (3) recognize the constructive loss allocated to each company and
adjust bond investment and carrying value of the intercompany debt to par value.
Slide
9-22
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper—2012
Worksheet entries for 2012.
4. Bonds Payable
Investment in S Company Bonds
300,000
300,000
To eliminate intercompany bond investment and liability.
5. Dividend Income
Dividends Declared—S Company
6. Beginning Retained Earnings—S Company
Common Stock—S Company
Investment in S Company Stock
Noncontrolling Interest in Equity
Slide
9-23
16,000
16,000
700,000
1,000,000
1,360,000
340,000
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper—2012
Complete Equity
Method
If the complete equity method is used, entry (1), the
reciprocity entry, is not needed and the following entry
replaces entry (5) above.
Equity in S Company Income
Dividends Declared
Investment in S Company Stock
80,400
16,000
64,400
To eliminate the intercompany income and dividends.
Slide
9-24
LO 2 Allocating the constructive gain or loss.
Complete Equity
Method
Consolidated Statements Workpaper —2013
Income Statement
Sales
Equity income
Total revenue
Cost of goods sold
Interest expense
Other expenses
Loss on retirement
Total cost and expense
Net income
Noncontrolling interest
Net income
Retained Earnings Statement
Retained earnings, 1/1
Net income
Dividends declared
Retained earnings, 12/31
P
Company
3,104,000
80,400
3,184,400
1,700,000
S
Company
2,200,000
Eliminations
Debit
Credit
NCI
80,400 (3)
1,124,000
2,200,000
1,360,000
50,000
665,000
2,824,000
360,400
2,075,000
125,000
22,000 (1)
360,400
125,000
102,400
1,810,000
360,400
(150,000)
2,020,400
700,000
125,000
(20,000)
805,000
700,000 (4)
102,400
Balance Sheet
Investment in S Co. bonds
310,000
Investment in S. Co. stock
1,424,400
Other assets
Total assets
9% bonds payable
Discount on bonds payable
Other liabilities
Capital stock
Retained earnings
NCI in net assets 1/1
NCI in net assets 12/31
5,420,000
7,154,400
SlideTotal liab. & equity
9-25
802,400
-
16,000 (3)
16,000
10,000
300,000
64,400
1,360,000
2,134,000
3,000,000
2,020,400
2,620,000
2,620,000
500,000
(20,000)
335,000
1,000,000
805,000
1,000,000 (4)
802,400
7,154,400
2,620,000
2,102,400
22,600
22,600
22,600
(4,000)
18,600
(1)
(2)
(3)
1,810,000
360,400
(150,000)
2,020,400
-
(4)
300,000 (2)
12,000 (1)
16,000
340,000 (4)
2,102,400
Consolidated
Balances
5,304,000
5,304,000
3,060,000
50,000
1,789,000
22,000
4,921,000
383,000
(22,600)
360,400
18,600
340,000
358,600
8,040,000
8,040,000
200,000
(8,000)
2,469,000
3,000,000
2,020,400
358,600
8,040,000
Year Subsequent to Acquisition of Bonds, Entries on the
Books of Affiliated Companies—2013
P Company’s Books
Entries on June 30 and December 31
Cash
Interest Revenue
13,500
13,500
To record receipt of interest ($300,000 x 9% x 6/12).
Interest Revenue
Investment in S Company Bonds
1,250
1,250
To amortize premium on outstanding bonds ($10,000 8 periods).
Slide
9-26
LO 2 Allocating the constructive gain or loss.
Year Subsequent to Acquisition of Bonds, Entries on the
Books of Affiliated Companies—2013
S Company’s Books
Entries on June 30 and December 31
Interest Expense
Cash
22,500
22,500
To record payment of interest ($500,000 x 9% x 6/12).
Interest Expense
Discount on Bonds Payable
2,500
2,500
To amortize discount on outstanding bonds ($20,000 / 8 periods).
Slide
9-27
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper Entries
Worksheet entries for December 31, 2013.
1.
Investment in S Company Stock
244,000
Beginning Retained Earnings—P Company
244,000
To establish reciprocity, or convert to equity
($805,000 $500,000) x 80% = $244,000
2. Beginning Retained Earnings—P Company
Investment in S Company Bonds
10,000
10,000
To adjust beginning retained earnings for constructive loss (recorded in
prior year as workpaper entry only; see 2012 entry (2) and to adjust
investment to par.
Slide
9-28
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper Entries
Worksheet entries for December 31, 2013.
3. Beginning Retained Earnings—P Company *
9,600
Beginning Noncontrolling Interest **
2,400
Discount on Bonds Payable ($15,000 x 60%)
12,000
To adjust beginning retained earnings balances for unrecorded
constructive loss at beginning of the year (recorded in 2012 as workpaper
entry only; see 2012 entry (3)) and adjust intercompany bonds to par
value.
* ($12,000 x 80%)
** ($12,000 x 20%)
Slide
9-29
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper Entries
Worksheet entries for December 31, 2013.
4. Investment in S Company Bonds
Interest Revenue ($1,250 + $1,250)
2,500
2,500
To reverse the amortization of premium on investment recorded by
P Company during the current year (and not needed by consolidated
entity since the constructive loss was recorded in its entirety in
2012).
Slide
9-30
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper Entries
Worksheet entries for December 31, 2013.
5. Discount on Bonds Payable ($5,000 x 60%)
3,000
Interest Expense
3,000
To reverse amortization of discount on bonds payable recorded
by S Company during current year (and not needed by consolidated
entity since the constructive loss was recorded in its entirety in 2012).
6. Interest Revenue *
27,000
Interest Expense
27,000
To eliminate intercompany interest.
* ($45,000 x 60%) or ($13,500 + $13,500)
Slide
9-31
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper Entries
Worksheet entries for December 31, 2013.
7. Bonds Payable ($500,000 x 60%)
300,000
Investment in S Company Bonds
300,000
To eliminate intercompany bond investment and bonds payable.
8. Dividend Income
Dividends Declared—S Company
9. Beginning Retained Earnings—S Company
Common Stock—S Company
Investment in S Company Stock
Noncontrolling Interest in Equity
Slide
9-32
48,000
48,000
805,000
1,000,000
1,444,000
361,000
LO 2 Allocating the constructive gain or loss.
Consolidated Statements Workpaper—2013
Income Statement
Sales
Dividend income
Interest income
Total revenue
Cost of goods sold
Interest expense
Other expenses
Total cost and expense
Net income
Noncontrolling interest
Net income
Retained Earnings Statement
Retained earnings, 1/1
P Company
S Company
Net income
Dividends declared
Retained earnings, 12/31
Balance Sheet
Investment in S Co. bonds
Investment in S. Co. stock
Other assets
Total assets
9% bonds payable
Discount on bonds payable
Other liabilities
Capital stock
Retained earnings
NCI in net assets 1/1
NCI in net assets 12/31
Slide
9-33 Total liab. & equity
P
Company
3,546,000
48,000
24,500
3,618,500
2,040,000
S
Company
2,020,000
1,124,500
3,164,500
454,000
630,000
1,880,000
140,000
454,000
140,000
2,020,000
1,200,000
50,000
805,000
140,000
(60,000)
885,000
2,220,000
3,000,000
2,100,000
2,690,000
2,690,000
500,000
(15,000)
320,000
1,000,000
885,000
7,320,000
2,690,000
NCI
2,500 (4)
3,000 (5)
27,000 (6)
75,000
10,000 (2)
9,600 (3)
805,000 (9)
75,000
899,600
2,500 (4)
307,500
1,200,000
5,812,500
7,320,000
Eliminations
Credit
48,000 (8)
27,000 (6)
1,796,000
454,000
(150,000)
2,100,000
Debit
Cost Method
32,500
244,000 (1)
10,000 (2)
300,000 (7)
1,444,000 (9)
300,000 (7)
3,000 (5)
12,000 (3)
1,000,000 (9)
899,600
2,400 (3)
324,500
361,000 (9)
2,451,500
28,600
28,600
1,754,500
5,014,500
551,500
(28,600)
522,900
28,600
(12,000)
16,600
2,020,400
522,900
(150,000)
2,393,300
244,000 (1)
32,500
48,000 (1)
324,500
2,451,500
Consolidated
Balances
5,566,000
5,566,000
3,240,000
20,000
-
16,600
358,600
375,200
8,502,500
8,502,500
200,000
(6,000)
2,540,000
3,000,000
2,393,300
375,200
8,502,500
Interim Purchase of Intercompany Bonds
Had the bonds been held during 2012, P Company would have
amortized a portion of the premium and S Company would have
amortized a part of the discount.
Assuming that P Company amortized $500 and S Company
amortized $600 during 2012, the original workpaper entries (2)
and (3) for constructive losses) are modified as follows:
Slide
9-34
2. Loss on Constructive Retirement Bonds
Interest Revenue
Investment in S Company Bonds
10,000
3. Loss on Constructive Retirement of Bonds
Interest Expense
Discount on Bonds Payable
12,000
500
9,500
600
11,400
Notes Receivable Discounted
A company may issue a note to an affiliated company that
may then discount the note with an outside party.
OR
A company holding a note receivable from an outside party
may discount the note with an affiliated company.
From a consolidation point of view, a receivable held by one of
the affiliated companies should be reported in the
consolidated balance sheet only if the note is due from an
outside party.
Slide
9-35
LO 3 Discounting a note issued to an affiliated
company with an outside company.
Stock Dividends Issued by a Subsidiary Company
Parent company records receipt of shares in a
memorandum entry only.
Subsidiary records the declaration of a stock dividend as
a transfer from retained earnings to one or more paid-in
capital account.
Amount transferred is dependent on a large or small
stock dividend.
Slide
9-36
LO 4 Stock dividends issued by a subsidiary.
Stock Dividends Issued by a Subsidiary Company
Illustration: Assume that P Company purchased 4,000
shares of S Company’s $100 par value common stock on
January 2, 2009, for $560,000. At the time of purchase, S
Company reported common stock and retained earnings
balances of $500,000 and $200,000, respectively. If
consolidated statements were prepared on January 2, 2009,
the investment eliminating entry would be:
Slide
9-37
Capital Stock—S Company
500,000
1/1 Retained Earnings—S Company
200,000
Investment in S Company
560,000
Noncontrolling Interest in Equity
140,000
LO 4 Stock dividends issued by a subsidiary.
Stock Dividends Issued by a Subsidiary Company
Illustration: Now assume that S Company reports net
income of $50,000 and declares a 30% stock dividend (1,500
shares) on December 31, 2009. S Company would record the
dividend as follows (par value):
Stock Dividend Declared (or R/E)
Capital Stock (1,500 shares $100)
150,000
150,000
The only entry made by P Company in 2009 is a memorandum
entry to record the receipt of 1,200 shares from S Company.
Slide
9-38
LO 4 Stock dividends issued by a subsidiary.
Consolidated Statements Workpaper—2009
Cost Method
Consolidated Statement Workpaper December 31, 2009
Income Statement
Net/consolidated income
Noncontrolling interest
Net income
Retained Earnings Statement
Retained earnings, 1/1
P Company
S Company
Net income
Dividends declared
Retained earnings, 12/31
Balance Sheet
Investment in S Company
Fixed assets
Total assets
P
Company
S
Company
240,000
50,000
240,000
50,000
Debit
Eliminations
Credit
-
-
NCI
10,000
10,000
290,000
(10,000)
280,000
10,000
(30,000)
(20,000)
460,000
280,000
740,000
460,000
240,000
700,000
200,000
50,000
(150,000)
100,000
200,000 (2)
200,000
120,000 (1)
120,000
Consolidated
Balances
560,000 (2)
560,000
1,240,000
1,800,000
800,000
800,000
2,040,000
2,040,000
Total liabilities
Capital stock
P Company
S Company
200,000
50,000
250,000
Retained earnings
NCI in net assets 1/1
NCI in net assets 12/31
Total liab. & equity
700,000
100,000
120,000 (1)
500,000 (2)
200,000
1,800,000
800,000
820,000
Slide
9-39
900,000
650,000
30,000
120,000
140,000 (2)
820,000
(20,000)
140,000
150,000
900,000
740,000
150,000
2,040,000
LO 4 Stock dividends issued by a subsidiary.
Stock Dividends Issued by a Subsidiary Company
Worksheet Entries – Year Stock Dividends Are Declared
1.
Capital Stock—S Company
120,000
Stock Dividends Declared—S Company
120,000
To reverse effects of stock dividend ($150,000 x 80%).
2. 1/1 Retained Earnings—S Company
Capital Stock—S Company
200,000
500,000
Investment in S Company
560,000
Noncontrolling Interest in Equity
140,000
To eliminate investment account and recognize noncontrolling interest.
Slide
9-40
LO 4 Stock dividends issued by a subsidiary.
Stock Dividends Issued by a Subsidiary Company
Stock Dividends Issued from Postacquisition Earnings
If the stock dividend had been more than retained
earnings ($200,000), some of the postacquisition
earnings of the subsidiary would have been capitalized.
Committee on Accounting Procedure:
Occasionally, subsidiary companies capitalize retained earnings
arising since acquisition, by means of a stock dividend or
otherwise. This does not require a transfer to capital surplus
on consolidation.
Slide
9-41
LO 6 Subsidiary stock dividends issued from postacquisition earnings.
Stock Dividends Issued by a Subsidiary Company
Dividends from Preacquisition Earnings
Effects of a liquidating dividend on the consolidated
statements workpaper entries:
Assume that P Company acquired an 80% interest in S
Company on January 2, 2009, for $560,000. At the time of
purchase, S Company had capital stock and retained earnings
in the amounts of $500,000 and $200,000, respectively.
During the first year that the investment was held, S
Company reported net income of $200,000. On December 31,
2009, the subsidiary declared and paid a cash dividend of
$250,000.
Slide
9-42
LO 6 Subsidiary stock dividends issued from preacquisition earnings.
Stock Dividends Issued by a Subsidiary Company
Dividends from Preacquisition Earnings
Liquidating dividends are accounted for as a return of
part of the original investment.
P Company’s Books
Cash
200,000
Dividend Income ($200,000 x 80%)
160,000
Investment in S Company ($50,000 x 80%)
40,000
To record receipt of a cash dividend from S Company
Slide
9-43
LO 6 Subsidiary stock dividends issued from preacquisition earnings.
Stock Dividends Issued by a Subsidiary Company
Dividends from Preacquisition Earnings
The December 31, 2009, eliminating entries are as follows:
1.
Dividend Income
160,000
Dividends Declared—S Company
160,000
To eliminate intercompany dividends.
2. Investment in S Company
Dividends Declared—S Company
40,000
40,000
To reverse the liquidating dividend.
Slide
9-44
LO 6 Subsidiary stock dividends issued from preacquisition earnings.
Stock Dividends Issued by a Subsidiary Company
Dividends from Preacquisition Earnings
The December 31, 2009, eliminating entries are as follows:
3. Beginning Retained Earnings—S Co.
Capital Stock—S Company
200,000
500,000
Investment in S Company
560,000
Noncontrolling Interest in Equity
140,000
To eliminate investment account and create noncontrolling
interest.
Slide
9-45
LO 6 Subsidiary stock dividends issued from preacquisition earnings.
Subsidiary with Preferred and Common Stock Outstanding
Determining Equity Interest of Each Class of
Stockholders
Subsidiary company preferred shares not held by the parent
company are considered part of the noncontrolling interest.
In consolidation, each class of stockholders has an interest in
the net assets of the firm, so it is necessary to allocate:
 Subsidiary’s Stockholders’ Equity between preferred and
common stock interests.
 Retained Earnings and Net Income amounts to each class of
stockholders, based on dividend preference.
Slide
9-46
LO 7 Allocating the purchase price between
common and preferred stockholders.
Consolidating with Preferred Stock Outstanding
Illustration: Assume the following information concerning
the capital accounts of S Company as of January 2, 2009:
8%, $100 par value preferred stock, cumulative,
nonparticipating, dividends in arrears for 2008,
call price is $103,5,000 shares outstanding
$ 500,000
Common stock, $10 par value
Other contributed capital—excess on issue
of common stock over par
305,000
Retained earnings
200,000
Total stockholders’ equity
Slide
9-47
1,000,000
$2,005,000
LO 7 Allocating the purchase price between
common and preferred stockholders.
Consolidating with Preferred Stock Outstanding
On January 2, 2009, P Company acquired 80% of the
outstanding common stock for $1,160,000 and 30% of the
outstanding preferred stock for $180,000. During the year, S
Company reported net income of $200,000 and declared no
cash dividends. The entry to record the purchase is:
P Company’s Books
Investment in S Co. preferred stock
Investment in S Co. Common Stock
Cash
Slide
9-48
180,000
1,160,000
1,340,000
LO 7 Allocating the purchase price between
common and preferred stockholders.
Consolidating with Preferred Stock Outstanding
Computation and Allocation of Difference Between Implied
and Book Value Acquired—Preferred Stock
Date of Acquisition - 1/1/ 2009
Parent
30%
NCI
70%
Total
100%
Purchase price and implied value
$ 180,000 $ 420,000 $ 600,000
Less: Book value of equity acquired:
$100 par preferred stock - 8%
(150,000)
(350,000)
(500,000)
Retained earnings **
(16,500)
(38,500)
(55,000)
Difference between implied and BV
13,500
31,500
45,000
Reduce Paid-in-Capital—Parent
(13,500)
Reduce Noncontrolling Interest in Equity *
(31,500)
Total allocated
(45,000)
Balance
0
0
0
* Noncontrolling interest after adjustment $420,000 - $31,500 = $388,500
** ($103 call + $8 dividends in arrears - $100 par) x 5,000 shares = $11 x 5,000
Slide
9-49
= $55,000
LO 7 Allocating the purchase price between
common and preferred stockholders.
Consolidating with Preferred Stock Outstanding
Consolidated Statements Workpaper Entries—2009
Cost Method or Partial Equity Method
1a. Beginning Retained Earnings—S Co.
Preferred Stock—S Co.
55,000
500,000
Difference Between Implied and BV
45,000
Investment in S Co. Preferred Stock
180,000
Noncontrolling Interest in Equity
420,000
To eliminate the preferred stock investment account and recognize
the noncontrolling interest in equity.
Slide
9-50
LO 7 Allocating the purchase price between
common and preferred stockholders.
Consolidating with Preferred Stock Outstanding
Consolidated Statements Workpaper Entries—2009
Cost Method or Partial Equity Method
1b. Other Contributed Capital—P Company
13,500
Noncontrolling Interest in Equity
31,500
Difference Between Implied and Book Value
45,000
To allocate the difference between implied and book values of
preferred stock to equity.
Slide
9-51
LO 7 Allocating the purchase price between
common and preferred stockholders.
Consolidating with Preferred Stock Outstanding
Computation and Allocation of Difference Between Implied
and Book Value Acquired—Common Stock
Parent
80%
Date of Acquisition - 1/1/ 2009
Purchase price and implied value
Less: Book value of equity acquired:
$10 par common stock
Contributed capital -common stock
Retained earnings*
Difference between implied and BV
$ 1,160,000
(800,000)
(244,000)
(116,000)
0
NCI
20%
$
290,000
(200,000)
(61,000)
(29,000)
0
Total
100%
$ 1,450,000
(1,000,000)
(305,000)
(145,000)
0
* $200,000 - $55,000 = $145,000
Slide
9-52
LO 7 Allocating the purchase price between
common and preferred stockholders.
Consolidating with Preferred Stock Outstanding
Consolidated Statements Workpaper Entries—2009
Cost Method or Partial Equity Method
2.
Beginning Retained Earnings—S Co.
Common Stock—S Co.
1,000,000
Other Contributed Capital—S Co.
Investment in S Co. Common Stock
NCI in Equity
145,000
305,000
1,160,000
290,000
To eliminate the common stock investment account and recognize
NCI.
Slide
9-53
LO 7 Allocating the purchase price between
common and preferred stockholders.
Consolidating with Preferred Stock Outstanding
Noncontrolling interest in the consolidated income for 2009
is computed as follows:
Contribution
to Consolidated
Income
Reported net income of S Company
Income allocated to preferred stock
Income allocated to common stock
NCI in consolidated income
Slide
9-54
$
200,000
$
40,000
160,000
NCI %
70%
20%
NCI
$
28,000
32,000
$
60,000
LO 7 Allocating the purchase price between
common and preferred stockholders.
Consolidating with Preferred Stock Outstanding
Consolidated Statement Workpaper December 31, 2009
P
Income Statement
Company
Net/consolidated income
800,000
Noncontrolling interest
in Dividend income
Preferred stock
Common stock
Net income
800,000
Retained Earnings Statement
Retained earnings, 1/1
P Company
1,450,000
S Company
Preferred stock
Common stock
Net income
800,000
Dividends declared
(500,000)
Retained earnings, 12/31 1,750,000
Balance Sheet
Investment in S Company
Preferred stock
180,000
Common stock
1,160,000
Difference Implied and BV
Other assets
5,410,000
SlideTotal assets
6,750,000
9-55
S
Company
200,000
200,000
Eliminations
Debit
Credit
-
55,000
145,000
200,000
55,000
145,000
400,000
200,000
28,000
32,000
60,000
-
(1a)
(2)
60,000
-
180,000
1,160,000
(1a)
45,000
45,000
2,805,000
2,805,000
NCI
60,000
(1a)
(2)
(1b)
Cost
Method
Page 1
Consolidated
Balances
1,000,000
(60,000)
940,000
1,450,000
940,000
(500,000)
1,890,000
8,215,000
8,215,000
Consolidating with Preferred Stock Outstanding
Retained earnings, 1/1
P Company
S Company
Preferred stock
Common stock
Net income
Dividends declared
Retained earnings, 12/31
Balance Sheet
Investment in S Company
Preferred stock
Common stock
Difference Implied and BV
Other assets
Total assets
Total liabilities
Preferred stock S Co.
Common stock
Other contributed capital
P Company
S Company
Retained earnings
NCI in net assets 1/1
NCI in net assets 12/31
SlideTotal liab. & equity
9-56
1,450,000
800,000
(500,000)
1,750,000
55,000
145,000
200,000
55,000
145,000
400,000
200,000
180,000
1,160,000
5,410,000
6,750,000
1,600,000
3,000,000
6,750,000
-
180,000
1,160,000
45,000 (1a)
45,000
2,805,000
2,805,000
600,000
500,000
1,000,000
400,000
1,750,000
60,000
305,000
400,000
2,805,000
500,000
1,000,000
(1a)
13,500
305,000
200,000
31,500
(1b)
60,000
(1a)
(2)
(1b)
(2)
(2)
60,000
(1b) 420,000(1a) 678,500
290,000 (2)
738,500
2,095,000
2,095,000
Cost
Method
Page 2
1,450,000
940,000
(500,000)
1,890,000
8,215,000
8,215,000
2,200,000
3,000,000
386,500
1,890,000
738,500
8,215,000
Copyright
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Slide
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