江西财经大学高级财务会计国际学院题库chapter_07

1、advanced accounting, 11e (beams/anthony/bettinghaus/smith)chapter 7 intercompany profit transactions - bondsmultiple choice questions1) if the price paid by a parent company to acquire the debt of a subsidiary is greater than the book value of the liability, a _ occurs.a) realized loss on the retire

2、ment of debt from the viewpoint of the subsidiaryb) realized gain on the retirement of debt from the viewpoint of the subsidiaryc) constructive loss on the retirement of debt from the viewpoint of the consolidated entityd) constructive gain on the retirement of debt from the viewpoint of the consoli

3、dated entityanswer: cobjective: lo1difficulty: easy2) if an affiliate purchases bonds in the open market, the book value of the intercompany bond liability at the time of purchase isa) always assigned to the parent company because it has control.b) the par value of the bonds less the unamortized dis

4、count or plus the unamortized premium.c) par value.d) the par value of the bonds plus the unamortized discount or less the unamortized premium.answer: bobjective: lo1difficulty: easy3) bonds issued by a company remain on their books as a liability, but are considered constructively retired whena) th

5、e company borrows money from unaffiliated entities to re-purchase its own bonds at a gain.b) the company borrows money from an affiliate to re-purchase its own bonds at a gain.c) the companys parent or subsidiary purchases the bonds from outside entities.d) the company borrows money from an affiliat

6、e to repurchase its own bonds at a gain or at a loss.answer: cobjective: lo1difficulty: easyuse the following information to answer the question(s) below.pascalian company owns a 90% interest in sapp company. on january 1, 2010, pascalian had $300,000, 6% bonds outstanding with an unamortized premiu

7、m of $9,000. the bonds mature on december 31, 2014. sapp acquired one-third of pascalians bonds in the open market for $97,000 on january 1, 2010. both companies use straight-line amortization of bond discounts/premiums. interest is paid on december 31. on december 31, 2010, the books of the two aff

8、iliates held the following balances:pascalians books6% bonds payable$300,000premium on bonds7,200interest expense16,200sapps booksinvestment in pascalian bonds$ 97,600interest income6,6004) the gain from the bond purchase that appeared on the december 31, 2010 consolidated income statement wasa) $4,

9、320.b) $4,800.c) $5,400.d) $6,000.answer: dexplanation: d) book value of pascalians bonds acquired by sapp equals 1/3times ($300,000 + $9,000)$103,000less: cost of acquiring pascalian bonds( 97,000)constructive gain on bonds$ 6,000objective: lo2difficulty: moderate5) consolidated interest expense an

10、d consolidated interest income, respectively, that appeared on the consolidated income statement for the year ended december 31, 2010 wasa) $10,800 and $0.b) $10,800 and $6,600.c) $0 and $0.d) $16,200 and $6,600.answer: aexplanation: a) consolidated interest expense =$16,200 2/3$10,800objective: lo2

11、difficulty: moderate6) prussia corporation owns 80% the voting stock of stad corporation. on january 1, 2010, prussia paid $391,000 cash for $400,000 par of stads 10% $1,000,000 par value outstanding bonds, due on april 1, 2015. stads bonds had a book value of $1,045,000 on january 1, 2010. straight

12、-line amortization is used. the gain or loss on the constructive retirement of $400,000 of stad bonds on january 1, 2010 was reported in the 2010 consolidated income statement in the amount ofa) $14,000.b) $21,600.c) $23,000.d) $27,000.answer: dobjective: lo2difficulty: moderateuse the following inf

13、ormation to answer the question(s) below.pfadt inc. had $600,000 par of 8% bonds payable outstanding on january 1, 2011 due january 1, 2015 with an unamortized discount of $12,000. senat is a 90%-owned subsidiary of pfadt. on january 2, 2011, senat corporation purchased $150,000 par value of pfadts

14、outstanding bonds for $152,000. the bonds have interest payment dates of january 1 and july 1. straight-line amortization is used.7) with respect to the bond purchase, the consolidated income statement of pfadt corporation and subsidiary for 2011 showed a gain or loss ofa) $ 4,500.b) $ 5,000.c) $10,

15、800.d) $12,000.answer: bexplanation: b) ($588,000 0.25) -$152,000objective: lo2difficulty: moderate8) bond interest receivable for 2011 of pfadts bonds on senats books wasa) $5,400.b) $6,000.c) $10,800.d) $12,000.answer: bexplanation: b) $150,000 8% 1/2objective: lo2difficulty: moderate9) bonds paya

16、ble appeared in the december 31, 2011 consolidated balance sheet of pfadt corporation and subsidiary in the amount ofa) $398,925.b) $441,000.c) $443,250.d) $450,000.answer: cexplanation: c) $591,000 75%objective: lo2difficulty: moderateuse the following information to answer the question(s) below.pl

17、enty corporation issued six thousand, $1,000 par, 6% bonds on january 1, 2010, at par. interest is paid on january 1 and july 1 of each year; the bonds mature on january 1, 2015. on january 2, 2012, scrawn corporation, a 75%-owned subsidiary of plenty, purchased 3,000 of the bonds on the open market

18、 at 102.50. plentys separate net income for 2012 included the annual interest expense for all 3,000 bonds. scrawns separate net income for 2012 was $400,000, which included the bond interest received on july 1 as well as the accrual of bond interest revenue earned on december 31. both companies use

19、straight-line amortization of bond discounts/premiums.10) what was the amount of gain or (loss) from the intercompany purchase of plentys bonds on january 2, 2012?a) $(56,250)b) $(75,000)c) $ 75,000d) $ 56,250answer: bexplanation: b) total book value acquired =$6,000,000 50% $3,000,000purchase price

20、 3,000 $1,025 3,075,000loss on constructive retirement$ 75,000objective: lo2difficulty: moderate11) if the bonds were originally issued at 106, and 80% of them were purchased by scrawn on january 2, 2013 at 98, the gain or (loss) from the intercompany purchase wasa) $(384,000).b) $(211,200).c) $ 211

21、,200.d) $ 384,000.answer: cexplanation: c) book value at january 2, 2013 equals $6,360,000 minus $216,000= $6,144,000percentage of bonds acquired 80%equals book value acquired4,915,200purchase price 4,800 bonds $980= 4,704,000gain on constructive retirement=$ 211,200objective: lo2difficulty: moderat

22、e12) if the bonds were originally issued at 103, and 70% of them were purchased on january 2, 2014 at 104, the constructive gain or (loss) on the purchase wasa) $(142,800).b) $( 42,000).c) $ 42,000.d) $ 142,800.answer: aexplanation: a) book value at january 2, 2014 equals $6,180,000 minus $144,000 $

23、6,036,000percentage of bonds acquired 70%equals book value acquired 4,225,200purchase price 4,200 bonds $1,040 4,368,000loss on constructive retirement $ 142,800objective: lo2difficulty: moderate13) using the original information, the amount of consolidated interest expense for 2012 wasa) $ 135,000.

24、b) $ 180,000.c) $ 270,000.d) $ 360,000.answer: bexplanation: b) ($6,000,000 - $3,000,000) 6%objective: lo2difficulty: moderate14) using the original information, the balances for the bonds payable and bond interest payable accounts, respectively, on the consolidated balance sheet for december 31, 20

25、13 werea) $3,000,000 and $ 90,000.b) $3,000,000 and $180,000.c) $6,000,000 and $ 90,000.d) $6,000,000 and $180,000.answer: aexplanation: a) bonds payable $6,000,000 minus bonds held by scrawn of $3,000,000. interest accrued on december 31, 2013 will be the interest on bonds held by non-affiliates or

26、 $3,000,000 6% 1/2 yearobjective: lo2, 3difficulty: moderate15) using the original information, the elimination entries on the consolidation working papers prepared on december 31, 2012 included at leasta) debit to bond interest expense for $360,000.b) credit to bond interest expense for $180,000 an

27、d a debit to bond interest payable for $90,000.c) credit to bond interest receivable for $180,000.d) debit to bond interest revenue for $360,000.answer: bobjective: lo2difficulty: moderate16) no constructive gain or loss arises from the purchase of an affiliates bonds if thea) affiliate is a 100%-ow

28、ned subsidiary.b) bonds are purchased at book value.c) bonds are purchased with arms-length bargaining from outside entities.d) gain or loss cannot be reasonably estimated.answer: bobjective: lo1difficulty: easy17) there are several theories for allocating constructive gains or losses between purcha

29、sing and issuing affiliates. the agency theorya) does so based on the par value of the bonds purchased.b) assigns the entire constructive gain or loss to the parent based on their control of the decision to purchase the bonds.c) assigns the entire constructive gain or loss to the subsidiary based on

30、 the need to have the noncontrolling interest share in the retirement of the debt.d) assigns the entire constructive gain or loss to whichever company issued the bonds.answer: dobjective: lo1difficulty: easy18) pickle incorporated acquired a $10,000 bond originally issued by its 80%-owned subsidiary

31、 on january 2, 2011. the bond was issued in a prior year for $11,250, matures january 1, 2016, and pays 9% interest at december 31. the bonds book value at january 2, 2011 is $10,625, and pickle paid $9,500 to purchase it. straight-line amortization is used by both companies. how much interest incom

32、e should be eliminated in 2011?a) $720b) $800c) $900d) $1,000answer: dexplanation: d) $9,500 - $10,000 = discount to amortize as interest expense over 5 years, or $100 per year + $900 paid by issuer.objective: lo2, 3difficulty: moderateuse the following information to answer the question(s) below.po

33、e corporation owns an 80% interest in seri company acquired at book value several years ago. on january 2, 2011, seri purchased $100,000 par of poes outstanding 10% bonds for $103,000. the bonds were issued at par and mature on january 1, 2014. straight-line amortization is used. separate incomes of

34、 poe and seri for 2011 are $350,000 and $120,000, respectively. poe uses the equity method to account for the investment in seri.19) controlling interest share of consolidated net income for 2011 wasa) $443,600.b) $444,000.c) $444,400.d) $448,000.answer: bexplanation: b) poes separate income$ 350,00

35、0 income from seri ($120,000 80%) 96,000 less: loss on constructive retirement of poe bonds(3,000)plus: piecemeal recognition of the constructive loss ($3,000/3 years) 1,000 controlling interest share$ 444,000 objective: lo4difficulty: moderate20) noncontrolling interest share for 2011 wasa) $23,000

36、.b) $23,600.c) $24,000.d) $24,400.answer: cexplanation: c) since poe is the issuing entity, the gain or loss is not allocated to the noncontrolling interest. the noncontrolling interest share is ($120,000 20%) = $24,000.objective: lo4difficulty: moderateexercises1) separate company and consolidated

37、income statements for pitta and sojourn corporations for the year ended december 31, 2011 are summarized as follows: pitta soujourn consolidated sales revenue$ 500,000$ 100,000$ 600,000income from sojourn19,900bond interest income6,000gain on bond retirement3,000total revenues519,900106,000603,000co

38、st of sales$ 280,000$ 50,000$ 330,000bond interest expense9,0003,600other expenses 120,900 31,000 151,900total expenses 409,900 81,000 485,500consolidated net income 117,500noncontrolling interest share 7,500 separate net income andcontrol. interest share in consolidated net income$ 110,000 $ 25,000

39、$ 110,000the interest income and expense eliminations relate to a $100,000, 9% bond issue that was issued at par value and matures on january 1, 2016. on january 2, 2011, a portion of the bonds was purchased and constructively retired.required: answer the following questions.1.which company is the i

40、ssuing affiliate of the bonds payable?2.what is the gain or loss from the constructive retirement of the bonds payable that is reported on the consolidated income statement for 2011?3.what portion of the bonds payable is held by nonaffiliates at december 31, 2011?4.is sojourn a wholly-owned subsidia

41、ry? if not, what percentage does pitta own?5.does the purchasing affiliate use straight-line or effective interest amortization?6.explain the calculation of pittas $19,900 income from sojourn.answer: 1.pitta is the issuing affiliate.2.effect on consolidated net income:gain on constructive retirement

42、 of bonds$ 3,0003.percent of bonds held by nonaffiliates at december 31, 2011 is 40%, computed as $3,600 consolidated interest expense divided by $9,000 interest expense of pitta.4.sojourn is partially owned as evidenced by the noncontrolling interest share. the ownership percentage is 70% ($7,500 n

43、oncontrolling interest share divided by $25,000 income of sojourn = 30% noncontrolling interest.)5.straight-line amortization$100,000 par 60% purchased$60,000purchase price 5 years before maturity 57,000gain 3,000nominal interest ($60,000 9%)$ 5,400discount amortization ($3,000/5 years) 600bond inte

44、rest income $ 6,0006.pittas income from sojournshare of sojourns reported income($25,000 70%) =$17,500add: constructive gain3,000less: piecemeal recognition of constructive gain (600) income from sojourn$19,900objective: lo1, 2, 4difficulty: moderate2) platts incorporated purchased 80% of scarab com

45、pany several years ago when the fair value equaled the book value. on january 1, 2010, scarab has $100,000 of 8% bonds that were issued at face value and have five years to maturity. interest is paid annually on december 31. both platts and scarab would use the straight-line method to amortize any p

46、remium or discount incurred in the issuance or purchase of bonds. on january 1, 2011, platts purchased all of scarabs bonds for $96,000.required:1.prepare the journal entries in 2011 that would be recorded by platts and scarab on their separate financial records.2.prepare the consolidating working p

47、aper entries required for the year ending december 31, 2011.answer: requirement 1:platts entries:1/1/11investment in bonds$96,000cash$96,00012/31/11cash8,000interest income 8,000investment in bonds1,000interest income 1,000scarab entries:12/31/11interest expense 8,000cash 8,000requirement 2:consolid

48、ating entries:12/31/11bonds payable100,000investment in bonds97,000gain on retirement of debt3,000interest income9,000interest expense8,000gain on retirement of debt1,000objective: lo2, 3difficulty: moderate3) paka corporation owns an 80% interest in sandra company. paka acquired sandras bonds on ja

49、nuary 2, 2011. the following information is from the adjusted trial balances at december 31, 2011, at which time the bonds have three years to maturity. the bonds have interest payment dates of january 1 and july 1. straight-line amortization is used by both companies. paka sandra investment in sand

50、ra bonds, $100,000 par98,5007% bonds payable, $200,000200,000bond premium6,000interest expense12,000interest receivable7,000interest income7,500interest payable7,000required:prepare the necessary consolidation working paper entries on december 31, 2011 with respect to the intercompany bonds.answer:

51、2011 debit credit 12/31bond interest payable7,000bond interest receivable7,00012/31bonds payable100,000interest income7,500bond premium3,000interest expense (50% owned)6,000investment in sandras bonds 98,500gain on retirement of bonds6,000supporting computations:cost of bonds to paka ($98,500 - $500

52、)$98,000book value acquired 1/1/2011 where $2,000 per year is amortized($200,000 + $8,000) 50% =104,000gain on constructive bond retirement$6,000objective: lo2, 3difficulty: moderate4) pheasant corporation owns 80% of sal corporations outstanding common stock that was purchased at book value equal t

53、o fair value on january 1, 2005.additional information:1.pheasant sold inventory items that cost $3,000 to sal during 2012 for $6,000. one-half of this merchandise was inventoried by sal at year-end. at december 31, 2012, sal owed pheasant $2,000 on account from the inventory sales. no other interco

54、mpany sales of inventory have occurred since pheasant acquired its interest in sal.2.pheasant sold equipment with a book value of $5,000 and a 5-year useful life to sal for $10,000 on december 31, 2010. the equipment remains in use by sal and is depreciated by the straight-line method. the equipment

55、 has no salvage value.3.on january 2, 2012, sal paid $10,800 for $10,000 par value of pheasants 10-year, 10% bonds. these bonds were originally sold at par value, and have interest payment dates of january 1 and july 1, and mature on january 1, 2016. straight-line amortization has been applied by sal to the pheasant bond investment.4.pheasant uses the equity method in accounting for its investment in sal.required:complete the working papers to consolidate the financial statements of pheasant corporation and sal for the year ended dece