Advanced Accounting
by Debra Jeter and Paul Chaney
Chapter 10: Consolidated Financial
Statements - Miscellaneous Topics
Slides Authored by Hannah Wong, Ph.D.
Rutgers University
10 - 0
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
Constructive gain/loss
allocated to issuing company
Par value
Constructive gain/loss
allocated to
purchasing company
Purchase price
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Accounting for Intercompany Bonds
An Example
12/31/2001
P acquired S’s
9% bonds
12/31/2003
Bond
matures
Par value of bonds acquired = $500,000 x 60%
Book value of bonds acquired = $480,000 x 60%
Purchase price = $310,000
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Accounting for Intercompany Bonds
Book value
$288,000
$12,000
Constructive loss
allocated to S Company
Par value
$300,000
$10,000
Constructive loss
allocated to P Company
Purchase price
$310,000
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Accounting for Intercompany Bonds
Year of Intercompany Bond Purchase - EE’s
Loss on constructive retirement of bonds
Investment in S Bonds
10,000
10,000
(1) To recognize the constructive loss not recorded by P and
(2) adjust the intercompany bonds to par value
Loss on constructive retirement of bonds
Discount on bonds payable
12,000
12,000
(1) To recognize the constructive loss not recorded by S and
(2) adjust the intercompany bonds to par value
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Accounting for Intercompany Bonds
Year of Intercompany Bond Purchase - EE’s
Bonds payable
Investment in S Bonds
300,000
300,000
To eliminate intercompany bond investment and liability
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Intercompany Bonds
Cost and Partial Equity Methods
Year After Intercompany Bond Purchase - EE’s
Beginning retained earnings- P
Investment in S Bonds
10,000
10,000
(1) To record last year’s constructive loss not recorded by P and
(2) adjust the intercompany bond investment to par value
Beginning retained earnings- P
Beginning retained earnings- S
Discount on bonds payable
9,600
2,400
12,000
(1) To recognize the constructive loss not recorded by S and
(2) adjust the intercompany bonds to par value
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Intercompany Bonds
Cost and Partial Equity Methods
Year After Intercompany Bond Purchase - EE’s
Investment in S Bonds
Interest revenue
2,500
2,500
To reverse amortization of premium recorded by P in the current year
Discount on bonds payable
Interest expense
3,000
3,000
To reverse amortization of discount recorded by S in the current year
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Intercompany Bonds
Cost and Partial Equity Methods
Year After Intercompany Bond Purchase - EE’s
Interest revenue
Interest expense
27,000
27,000
To eliminate intercompany bond interest
Bonds payable
Investment in S Bonds
300,000
300,000
To eliminate intercompany bond investment and liability
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Intercompany Bonds
Complete Equity Method
Year After Intercompany Bond Purchase - EE’s
Investment in S
Beginning retained earnings- S
Discount on bonds payable
Investment in S Bonds
19,600
2,400
12,000
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
10 - 11
Intercompany Bonds
Complete Equity Method
Year After Intercompany Bond Purchase - EE’s
Investment in S Bonds
Interest revenue
2,500
2,500
To reverse amortization of premium recorded by P in the current year
Discount on bonds payable
Interest expense
3,000
3,000
To reverse amortization of discount recorded by S in the current year
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Intercompany Bonds
Complete Equity Method
Year After Intercompany Bond Purchase - EE’s
Bonds payable
Investment in S Bonds
300,000
300,000
To eliminate intercompany bond investment and liability
Interest revenue
Interest expense
27,000
27,000
To eliminate intercompany bond interest
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Intercompany Bonds
Consolidated NI-Year after Bond Purchase
Reported income of P
Dividend income
Constructive loss recorded by P
in the current year (premium
amortization)
P’s contribution to combined income
Reported NI of S
+ Constructive loss recorded
by S in the current year
(discount amortization)
Adjusted NI of S x P%
Consolidated net income
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Upstream Sales - Equipment
Cost and Partial Equity Methods
Consolidated Retained Earnings
Constructive loss NOT
recorded by P
Increase in R/E of S
- Constructive loss NOT
recorded by S
Ending Reported R/E of P
Increase in S R/E x P%
since acquisition
Consolidated R/E
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Notes Receivable Discounted
Issues
$100,000 note
Parent
Company
Subsidiary
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 discounted
Cr Notes receivable
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Notes Receivable Discounted
Receives note
from third
party
Issues
$100,000 note
Parent
Company
Subsidiary
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 discounted
Cr Notes receivable
10 - 17
Stock Dividend from Subsidiary
Journal Entries
Subsidiary
Stock dividend declared (or R/E)
Capital stock
150,000
150,000
Parent
Memorandum entry only.
10 - 18
Stock Dividend from Subsidiary
Eliminating Entries
Year of stock dividend
Capital stock
Stock dividend declared (or R/E)
150,000
150,000
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
10 - 20
Subsidiary with Preferred Stock
Noncontrolling
interest
Common stock
held
by parent
Controlling
interest
Preferred stock
held
by parent
Preferred stock
not held
by parent
Common stock
not held
by parent
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Subsidiary with Preferred Stock
Controlling Interest in Net Income
Reported income of P
Dividend income
Other adjustments
P’s contribution to combined income
P’s share of S adjusted income
Consolidated net income
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 %)
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Advanced Accounting
by
Debra Jeter and Paul Chaney
Copyright © 2001 John Wiley & Sons, Inc. All rights reserved.
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