8-1
Baker / Lembke / King
Intercompany
Indebtedness
8
Electronic Presentation by
Douglas Cloud
Pepperdine University
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Direct Intercompany Debt Transfer
Peerless
Products
Intercorporate
debt
Special
Foods
Consolidated Entity
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-2
Indirect Intercompany Debt Transfer
Peerless
Products
Special
Foods
Issuance of
debt
Nonaffiliated
Corporation
Purchase of debt by Peerless
Consolidated Entity
McGraw-Hill/ Irwin
8-3
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-4
Bond Sale Directly to an Affiliate
On January 1, 20X1, Special Foods borrows $100,000
from Peerless Products by issuing to Peerless $100,000
par value, 12 percent, 10-year bonds.
Elimination Entries
(E1)Bonds Payable
100,000
Investment in Special Foods Bonds
100,000
Eliminate intercorporate bond holdings.
(E2) Interest Income
Interest Expense
Eliminate intercompany interest.
McGraw-Hill/ Irwin
12,000
12,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Bond Sale Directly to an Affiliate
On January 1, 20X1, Peerless Products
purchases $100,000 par value, 12 percent, 10year bonds from Special Foods for $90,000.
Entries by Special Foods
(3) Jan. 1 Cash
90,000
Discount on Bonds Payable
10,000
Bonds Payable
100,000
(4) July 1 Interest Expense
6,500
Discount on Bonds Payable
500
$10,000/20
Cash
6,000
McGraw-Hill/ Irwin
Same entry on December 31,
except Interest Payable is
$100,000 x .12 x 6/12
credited for $6,000.Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-5
8-6
Bond Sale Directly to an Affiliate
On January 1, 20X1, Peerless Products
purchases $100,000 par value, 12 percent, 10year bonds from Special Foods for $90,000.
Entries by Peerless Products
(6) Jan. 1 Investment in Special Foods Bonds 90,000
Cash
(7) July 1 Cash
Investment in Special Foods Bonds
Interest Income
McGraw-Hill/ Irwin
90,000
6,000
500
6,500
Same entry on December 31,
except Interest Receivable is
debited for $6,000.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-7
Elimination Entries at Year-End
Item
Peerless
Products
Special
Foods
Bonds Payable
-0- $(100,000)
Disc. on Bonds Pay.
-09,000
Interest Payable
-0(6,000)
Investment
in Bonds
$91,000
-0Interest
Receivable
6,000
-0Interest Expense
-0$13,000
Interest Income $(13,000)
-0-
McGraw-Hill/ Irwin
Unadjusted Consolidated
Totals
Amounts
$(100,000)
9,000
(6,000)
-0-0-0-
91,000
-0-
6,000
$13,000
(13,000)
-0-0-0-
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-8
Elimination Entries at Year-End--20X1
(E9) Bonds Payable
100,000
Investment in Special Foods Bonds
Discount on Bonds Payable
Eliminate intercorporate bond holdings.
91,000
9,000
(E10) Interest Income
Interest Expense
Eliminate intercompany interest.
13,000
13,000
(E11) Interest Payable
Interest Receivable
Eliminate intercompany interest
receivable/payable.
6,000
McGraw-Hill/ Irwin
6,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-9
Elimination Entries at Year-End--20X2
(12) Bonds Payable
100,000
Investment in Special Foods Bonds
92,000
Discount on Bonds Payable
8,000
Eliminate intercorporate bond holdings.
(13) Interest Income
Interest Expense
Eliminate intercompany interest.
13,000
(14) Interest Payable
Interest Receivable
Eliminate intercompany interest
receivable/payable.
6,000
McGraw-Hill/ Irwin
13,000
6,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-10
8-10
Bonds of Affiliate Purchased from a
Nonaffiliate
January 1,
20X1
Issuance of
debt for
$102,000
Peerless
Products
Special
Foods
Nonaffiliated
Corporation
Purchase of debt by Peerless for
$91,000 on December 31, 20X1
Consolidated Entity
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-11
Bond Liability Entries--20X1
On January 1, 20X1, Special Foods issues 10-year, 12
percent bonds payable with a par value of $100,000; the
bonds are issued at 102. The bonds are purchased from
Special Foods by Nonaffiliated Corporation.
Entry by Special Foods
(15) Jan. 1 Cash
102,000
Bonds Payable
Premium on Bonds Payable
Sale of bonds to Nonaffiliated.
100,000
2,000
Special Foods
$100,000
Special Foods
$100,000
Special
Foods
McGraw-Hill/ Irwin
Nonaffliliated
Corporation
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-12
Bond Liability Entries--20X1
Entries by Special Foods
(16) June 30 Interest Expense
5,900
Premium on Bonds Payable
100
Cash
Semiannual payment of interest.
6,000
(17)Dec. 31 Interest Expense
5,900
$2,000
Premium on Bonds Payable
100 ÷
20 interest$100,000
Cash
6,000
Semiannual payment of interest.periods x .12 x
6/12
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Bond Investment Entry--20X1
Entries by Peerless Products
(18) Dec. 31 Investment in Special Foods Bonds 91,000
Cash
91,000
Purchase of Special Foods bonds
from Nonaffililated Corporation.
This entry is the same as if the bonds purchased
were those of an unrelated company.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-13
8-14
Constructive Debt Retirement-20X1
Computation of Gain on Constructive Retirement
Book value of Special Foods’ bonds,
December 31, 20X1
Price paid by Peerless to purchase bonds
Gain on constructive retirement of bonds
McGraw-Hill/ Irwin
$101,800
-91,000
$ 10,800
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-15
Constructive Debt Retirement--20X1
Item
Income from
Subsidiary
Peerless
Products
Special
Foods
Eliminations
Debits
Credits
Consolidated
40,000
Dividends
Declared
(60,000)
Investment in
Special Foods
Stock
256,000
(30,000)
An entry is needed to eliminate the investment account
during 20X1, the parent’s share of the subsidiary’s net
income, and the dividends recognized during the year.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-16
Constructive Debt Retirement--20X1
Item
Income from
Subsidiary
Peerless
Products
40,000
Dividends
Declared
(60,000)
Investment in
Special Foods
Stock
256,000
McGraw-Hill/ Irwin
Special
Foods
Eliminations
Debits
Credits
Consolidated
40,000
(30,000)
24,000
16,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-17
Basic Equity-Method Entries--20X1
Entries by Peerless Products
(19) Investment in Special Foods Bonds
Income from Subsidiary
Record equity-method income:
$50,000 x .80
40,000
(20) Cash
24,000
Investment in Special Foods Stock
Record dividends from Special Foods:
$30,000 x .80
McGraw-Hill/ Irwin
40,000
24,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-18
Constructive Debt Retirement--20X1
Item
Peerless
Products
Special
Foods
Eliminations
Debits
Credits
Consolidated
Income to
Noncontrolling
Interest
Dividends
Declared
(60,000)
(30,000)
(21)
24,000
Noncontrolling
Interest
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Noncontrolling Interest’s Share of Income
Net income of Special Foods
Gain on constructive retirement of
bond
Realized net income of Special Foods
Noncontrolling stockholders’ share
$50,000
10,800
$60,800
x
.20
Noncontrolling interest’s share of income $12,160
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-19
8-20
Constructive Debt Retirement--20X1
Item
Peerless
Products
Special
Foods
Eliminations
Debits
Credits
Consolidated
Income to
Noncontrolling
Interest
Dividends
Declared
(60,000)
(30,000)
(21)
24,000
Noncontrolling
Interest
An entry is required eliminate the income from the subsidiary.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-21
Constructive Debt Retirement--20X1
Item
Peerless
Products
Special
Foods
Income to
Noncontrolling
Interest
Dividends
Declared
Noncontrolling
Interest
McGraw-Hill/ Irwin
Eliminations
Debits
Credits
(22) 12,160
(60,000)
(30,000)
Consolidated
(12,160)
24,000
(22) 6,000
(21)
(22)
(60,000)
6,160
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-22
Constructive Debt Retirement--20X1
Item
Retained Earnings, Jan. 1
Investment in
Special Foods
Stock
Common Stock
Noncontrolling
Interest
Peerless
Products
300,000
Special
Foods
Consolidated
100,000
256,000
500,000
Eliminations
Debits
Credits
(21)
16,000
(22)
6,160
200,000
An entry is necessary to eliminate Peerless’s investment account
and the stockholders’ equity balances of Special Foods at the
beginning of the year, and establish the amount of the
noncontrolling interest at the beginning of the year.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-23
Constructive Debt Retirement--20X1
Item
Retained Earnings, Jan. 1
Investment in
Special Foods
Stock
Common Stock
Noncontrolling
Interest
Peerless
Products
300,000
Special
Foods
100,000
Eliminations
Debits
Credits
(23)100,000
256,000
500,000
300,000
16,000
(23) 240,000
(21)
200,000
(23)200,000
500,000
(23)
McGraw-Hill/ Irwin
Consolidated
6,160
60,000
66,160
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-24
Constructive Debt Retirement--20X1
Peerless
Products
Item
Special
Foods
Eliminations
Debits
Credits
Consolidated
Gain on Bond
Retirement
Investment in
Special Foods
Bonds
Bonds Payable
Premium on
Bonds Payable
91,000
200,000
100,000
1,800
An entry is required to eliminate the
intercompany bond holdings and recognize the
gain on constructive retirement of the bonds.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-25
Constructive Debt Retirement--20X1
Item
Peerless
Products
Special
Foods
Eliminations
Debits
Credits
Gain on Bond
Retirement
Investment in
Special Foods
Bonds
Bonds Payable
Premium on
Bonds Payable
McGraw-Hill/ Irwin
91,000
200,000
100,000
1,800
(24)100,000
(24)
(24)
10,800
(24)
91,000
Consolidated
10,800
200,000
1,800
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-26
Consolidated Balances--20X1
Item
Bonds Payable
Premium on
Bonds Payable
Investment
in Bonds
Interest Expense
Interest Income
Gain on Bond
Retirement
McGraw-Hill/ Irwin
Peerless
Products
Special
Foods
-0- $(100,000)
Unadjusted Consolidated
Totals
Amounts
$(100,000)
-0-
-0-
(1,800)
(1,800)
-0-
$91,000
-0-0-
-0$ 11,800
-0-
91,000
$ 11,800
-0-
-0$11,800
-0-
-0-
-0-
-0-
(10,800)
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-27
Consolidated Net Income--20X1
Peerless’s separate operating income
$140,000
Peerless’s share of Special Foods’ income:
Special Foods’ net income
$50,000
Gain on constructive retirement of bonds 10,800
Special Foods’ realized income
$60,800
Peerless’s proportionate share
x
Consolidated net income, 20X1
McGraw-Hill/ Irwin
.80
48,640
$188,640
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-28
Noncontrolling Interest--20X1
Book value of Special Foods, December 31, 20X1:
Common stock
Retained earnings
Total reported book value
Gain on constructive retirement of bonds
$200,000
120,000
$320,000
10,800
Realized book value of Special Foods
Noncontrolling stockholders’ share
Noncontrolling interest, December 31, 20X1
$330,800
x
.20
$ 66,160
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-29
Subsequent Recognition of Gain
Bond
premium
$2,000
Book value of
bond liability
$1,800
Bond
discount
$9,000
Issue
McGraw-Hill/ Irwin
$100,000
Constructive
gain of
$10,800
Purchase
by affiliate
Carrying amount of
bond investment
Maturity
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-30
Investment Account--20X2
Investment in Special Foods Stock
20X0
Original cost
20X1
240,000
20X1
Equity accrual
($50,000 x .80)
Balance, 12/31/X1
40,000
256,000
McGraw-Hill/ Irwin
24,000
20X2
Dividends
($40,000 x .80)
20X2
Equity accrual
($75,000 x .80)
Balance, 12/31/X2
Dividends
($30,000 x .80)
32,000
60,000
284,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-31
Consolidation Workpaper--20X2
Item
Income from
Subsidiary
Peerless
Products
Special
Foods
Eliminations
Debits
Credits
Consolidated
60,000
Dividends
Declared
(60,000)
Investment in
Special Foods
Stock
284,000
(40,000)
An entry is needed to eliminate the investment account
during 20X2, the parent’s share of the subsidiary’s net
income, and the dividends recognized during the year.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-32
Consolidation Workpaper--20X2
Item
Income from
Subsidiary
Peerless
Products
60,000
Dividends
Declared
(60,000)
Investment in
Special Foods
Stock
284,000
McGraw-Hill/ Irwin
Special
Foods
Eliminations
Debits
Credits
Consolidated
(31) 60,000
(40,000)
(31)
32,000
(31)
28,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-33
Consolidation Workpaper--20X2
Item
Peerless
Products
Special
Foods
Eliminations
Debits
Credits
Consolidated
Income to
Noncontrolling
Interest
Dividends
Declared
(60,000)
(40,000)
(31)
32,000
Noncontrolling
Interest
An entry is required eliminate the income from the subsidiary.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-34
Consolidation Workpaper--20X2
Item
Peerless
Products
Special
Foods
Income to
Noncontrolling
Interest
Dividends
Declared
Noncontrolling
Interest
McGraw-Hill/ Irwin
Eliminations
Debits
Credits
(32) 14,760
(60,000)
(40,000)
Consolidated
(14,760)
(32)
32,000
8,000
(32)
6,760
(31)
(60,000)
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-35
Consolidation Workpaper--20X2
Item
Retained Earnings, Jan. 1
Investment in
Special Foods
Stock
Common Stock
Noncontrolling
Interest
Peerless
Products
420,000
Special
Foods
Consolidated
120,000
284,000
500,000
Eliminations
Debits
Credits
(21)
28,000
(32)
6,760
200,000
An entry is necessary to eliminate Peerless’s investment account
and the stockholders’ equity balances of Special Foods at the
beginning of the year, and establish the amount of the
noncontrolling interest at the beginning of the year.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-36
Consolidation Workpaper--20X2
Item
Retained Earnings, Jan. 1
Investment in
Special Foods
Stock
Common Stock
Noncontrolling
Interest
Peerless
Products
420,000
Special
Foods
120,000
Eliminations
Debits
Credits
(33)120,000
284,000
500,000
28,000
(33) 256,000
(31)
200,000
(33)200,000
500,000
(32)
(33)
McGraw-Hill/ Irwin
Consolidated
6,760
64,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-37
Consolidation Workpaper--20X2
Item
Interest Income
Interest Expense
Investment in
Special Foods
Bonds
Bonds Payable
Premium on
Bonds Payable
Noncontrolling
Interest
Peerless
Products
13,000
20,000
Special
Foods
Eliminations
Debits
Credits
Consolidated
11,800
92,000
200,000
100,000
1,600
(32)
(33)
6,760
4,000
An entry is required to eliminate intercompany holdings.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-38
Consolidation Workpaper--20X2
Item
Interest Income
Interest Expense
Investment in
Special Foods
Bonds
Bonds Payable
Premium on
Bonds Payable
Noncontrolling
Interest
Peerless
Products
13,000
20,000
Special
Foods
Eliminations
Debits
Credits
(34)
13,000
11,800
92,000
200,000
100,000
1,600
(34)
11,800
(34)
92,000
(34) 100,000
(34)
20,000
200,000
1600
(32)
(33)
(34)
McGraw-Hill/ Irwin
Consolidated
6,760
4,000
2,160
72,920
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-39
Consolidated Net Income--20X2
Peerless’s separate operating income
$173,000
Peerless’s share of Special Foods’ income:
Special Foods’ net income
$75,000
Peerless’s amortization of bond discount
- 1,000
Special Foods’ amortization of bond
premium
- 200
Income as a basis of apportionment
$73,800
Peerless’s proportionate share
x
Consolidated net income, 20X2
McGraw-Hill/ Irwin
.80
59,040
$232,040
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-40
Chapter Eight
The
End
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.