Mata kuliah : F0074 - Akuntansi Keuangan Lanjutan II
Tahun
: 2010
Intercompany Profit Transaction – Bonds
Pertemuan 9-10
Intercompany Profit Transactions – Bonds
1: Intercompany Receivables and Payables
Intercompany Payables and Receivables
Remove intercompany:
– Payables and interest expense
– Receivables and interest income
Loans directly between affiliates generally pose no special
problems
Retirement of Debt
1. Issuing firm uses own resources to retire its own bonds – no
intercompany (IC) issues
2. Issuing firm borrows from unaffiliated entity and uses funds
to retire its own debt – no IC
3. Issuing firm borrows from affiliate and uses funds to retire
its own debt – simple IC loan
4. Non-issuing firm purchases debt securities of an affiliate
resulting in constructive retirement – IC constructive
retirement
Constructive Retirement
One company purchases debt instruments of an affiliate from
outside entities
Constructive gains and losses on bonds are
1. Realized gains and losses from the consolidated viewpoint
2. That arise when a company purchases the bonds of an
affiliate
3. From other entities
4. At a price other than the book value of the bonds.
Agency Theory
• Agency theory
– Assigns gain or loss to the issuing firm
– Conceptually a superior than other methods
• Text:
– Follows agency theory
– Simplifies discussion using straight line amortization of
premiums & discounts
• Other methods
– Par value theory or assign all gain or loss to the parent
Intercompany Profit Transactions – Bonds
2: Profits on Bonds
Parent is Issuer
At constructive retirement
– Remove Investment in Bonds
– Remove proportionate share of Bonds payable and
unamortized premium or discount
– Realize a gain or loss
The gain or loss at constructive retirement is recognized over
the life of the bonds
Gain or loss is attributed solely to the parent
Subsidiary Acquires Parent Bonds
Pam owns 70% of Sue, acquired at book value. Sue's net income for
2010 is $220.
On 1/1/10, Pam has $10,000 bonds outstanding with unamortized
premium of $100. Bonds mature in 5 years. Straight line
amortization.
On 1/1/10, Sue acquires $1,000 of Pam's bonds on the open market
at $950. Straight line.
•
•
•
•
Portion of bonds retired: 1,000/10,000 = 10%
Gain on retirement: 10%(10,100) – 950 = $60
Pam's Investment in Sue: 70%(220) + 60 – 12 = $202
Non-controlling interest share: 30%(220) = $66
Amortizations and Interest
Pam's
Bonds
10% retired
Book
value During
1/1/201
2010
$10,10
-$20
$1,010
Interest
10% retired
Sue's books:
Investment
bonds
Interest
$950
Book
12/31/201
$10,080
$1,008
During
Book
2011
12/31/201
-$20
$10,060
$1,006
500+500=$980
500+500=$980
$98
$98
+$10
50+50+10
=$110
$960
+$10
50+50+10
=$110
$970
Worksheet Entries for Bonds
Entries for 2010 worksheet.
Bonds payable
1,008
960
48
Investment in bonds
Gain on retirement of bonds
Interest income
Interest expense
Gain on retirement of bonds
110
98
12
• Had a consolidated balance sheet been prepared on 1/1/2010, the date of
the retirement, the first entry would have recorded amounts at $1010, $950,
and $60, respectively. There would be no interest.
• One entry could have been used above, with a gain of $60.
Intercompany Profit Transactions – Bonds
3: Constructive Retirement of Debt
Piecemeal Recognition
The constructive gain of $60 is recognized in 2010 when the
bonds are constructively retired.
The difference between interest income $98 and interest
expense on the retired bonds $110 is $12.
This $12 is an adjustment to investment income.
Pam is the issuer, so the full $12 is attributed to Pam.
If Sue was the issuer, the $12 would be shared among the
controlling and noncontrolling interests.
2011 Worksheet Entries
Entries for 2011 worksheet, assuming that Pam has not yet
paid the second interest payment.
Bonds payable
Interest income
1,006
110
970
98
48
Investment in bonds
Interest expense
Investment in Sue
Interest payable
Interest receivable
50
50
Subsequent Worksheet Entries
Notice that there is no gain in subsequent years. The $60 is
reduced each year by $12 and is a credit to the Investment in
Sue account.
Had Sue been the issuer, the $48 would be shared between
Investment in Sue and Non-controlling Interest.
Intercompany Profit Transactions – Bonds
4: Effect on Non-controlling Interest
Subsidiary Issuer with Gain
Constructive gain
– Purchase price of the debt is less than the book value
– Share gain between CI and NCI in year of retirement.
• Increase Income from subsidiary
• Increase Non-controlling interest share
– In current and subsequent years, use piecemeal
recognition
• Reduce Income from subsidiary
• Reduce Non-controlling interest share
Subsidiary Issuer with Loss
Constructive loss
– Purchase price of the debt is greater than the book value
– Share loss between CI and NCI in year of retirement.
• Reduce Income from subsidiary
• Reduce Non-controlling interest share
– In current and subsequent years, use piecemeal
recognition
• Increase Income from subsidiary
• Increase Non-controlling interest share
Parent Acquires Subsidiary Bonds
Pine owns 80% of Scent, acquired at book value. Scent's net income for
2010 is $500.
On 1/1/10, Scent has $5,000 bonds outstanding with unamortized discount
of $200. Bonds mature in 8 years. Straight line amortization.
On 1/1/10, Pine acquires $2,000 of Scent's bonds on the open market at
$2,040. Straight line.
•
•
•
•
Portion of bonds retired: 2,000/5,000 = 40%
Loss on retirement: 40%(4,800) – 2,040 = -$120
Pine's Investment in Scent: 80%(500 – 120 + 15) = $316
Noncontrolling interest share: 20%(500 – 120 + 15) = $79
Amortizations and Interest
Scent's
Bonds
40% retired
Book
value
1/1/20
$4,800
$1,920
Interest
40% retired
Pine's
Investment
bonds
Interest
$2,040
During
2010
+$25
Book
12/31/20
$4,825
$1,930
During
2011
+$25
250+250+2
=$525
250+250+2
=$525
$210
$210
-$5
100+100-5
=$195
$2,035
-$5
100+100-5
=$195
Book
12/31/20
$4,850
$1,940
$2,030
2010 Entries with Loss
Entries for 2010 worksheet.
Bonds payable
1,930
Interest income
195
Loss on retirement of bonds
120
Interest expense
Investment in bonds
210
2,035
Amortizations and Interest
Scent's
Bonds
40% retired
Book
value
1/1/20
$4,800
$1,920
Interest
40% retired
Pine's
Investment
bonds
Interest
$2,040
During
2010
+$25
Book
12/31/20
$4,825
$1,930
During
2011
+$25
250+250+2
=$525
250+250+2
=$525
$210
$210
-$5
100+100-5
=$195
$2,035
-$5
100+100-5
=$195
Book
12/31/20
$4,850
$1,940
$2,030
2011 Worksheet Entries
Entries for 2011 worksheet, assuming that Scent has not yet
paid the second interest payment.
Bonds payable
1,940
Interest income
195
Investment in Scent
105
Investment in bonds
2,030
Interest expense
Interest payable
Interest receivable
210
100
100