Overview of Chapter

Chapter 08 - INTERCOMPANY INDEBTEDNESS
CHAPTER 8
INTERCOMPANY INDEBTEDNESS
OVERVIEW OF CHAPTER
Chapter 8 illustrates the consolidation procedures needed to eliminate the financial

statement effects of direct and indirect intercorporate debt transfers. Elimination of direct sale of
bonds between the parent and subsidiary are discussed at the beginning of the chapter. Transfers
occurring at par value and at a discount or premium are illustrated. For transfers at a premium or
discount, the journal entries recorded by both the debtor and bond investor are given before the
consolidation entries are presented.
Consolidation procedures following a purchase of an affiliate's bonds from a nonaffiliate
are discussed in detail. Consolidation entries needed to provide recognition of a gain or loss on
the constructive retirement in the consolidated income statement in the period of purchase and
the appropriate entries in subsequent periods are illustrated. Computations are presented to aid
the student in gaining an understanding of the effect of a constructive gain or loss on
consolidated net income and the income and net assets assigned to the noncontrolling interest.
The effective interest method is used for amortization of the bond discount/premium.
Appendix 8A discusses and illustrates consolidation procedures to eliminate the effects of
intercompany indebtedness, assuming that the parent utilizes the fully adjusted equity method to
account for its investment and that bond discounts and premiums are amortized on a straight line
basis.
Appendix 8B discusses and illustrates consolidation procedures to eliminate the effects of
intercompany indebtedness, assuming that the parent utilizes the modified equity method or the
cost method to account for its investment and that bond discounts and premiums are amortized
on a straight line basis.
LEARNING OBJECTIVES
When students finish studying this chapter, they should be able to:
LO 8-1 Understand and explain concepts associated with intercompany debt transfers.
LO 8-2 Prepare journal entries and consolidation entries related to direct intercompany debt
transfers.
LO 8-3 Prepare journal entries and consolidation entries related to an affiliate’s debt
Copyright © 2019 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior consent of McGraw-Hill
Education.
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purchased from a nonaffiliate at an amount less than book value.

purchased from a nonaffiliate at an amount more than book value.
SYNOPSIS OF CHAPTER 8
Intercompany Indebtedness
Caesars Entertainment Corporation’s Debt Transfers
Consolidation Overview
LO 8-2 Prepare journal entries and consolidation entries related to direct intercompany
debt transfers.
Bond Sale Directly to an Affiliate

Transfer at Par Value
Transfer at a Discount or Premium
Bonds of Affiliate Purchased from a Nonaffiliate

Purchase at Book Value
Purchase at an Amount Less than Book Value
Purchase at an Amount Higher than Book Value
Appendix 8A: Intercompany Indebtedness—Fully Adjusted Equity Method

Using Straight-Line Interest Amortization
Transfer at a Discount or Premium
Entries by the Debtor
Entries by the Bond Investor
Consolidation Entries at Year-End
Bonds of Affiliate Purchased from a Nonaffiliate
Purchase at Book Value
Purchase at an Amount Less than Book Value
Bond Liability Entries—20X1
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Bond Investment Entries—20X1

Computation of Gain on Constructive Retirement of Bonds
Assignment of Gain on Constructive Retirement
Fully Adjusted Equity-Method Entries—20X1
Consolidation Worksheet—20X1
Consolidated Net Income—20X1
Noncontrolling Interest—December 31, 20X1
Bond Liability Entries—20X2
Bond Investment Entries—20X2
Subsequent Recognition of Gain on Constructive Retirement
Fully Adjusted Equity-Method Entries—20X2
Consolidation Worksheet—20X2
Investment Account—20X2
Consolidated Net Income—20X2
Noncontrolling Interest—December 31, 20X2
Bond Consolidation Entry in Subsequent Years
Purchase at an Amount Higher than Book Value
Appendix 8B: Intercompany Indebtedness—Modified Equity Method and Cost Method

Modified Equity Method
Modified Equity-Method Entries—20X1
Consolidation Entries—20X1
Modified Equity-Method Entries—20X2
Cost Method
NOTES ON POWERPOINT SLIDES

We have attempted to provide PowerPoint slides that will be useful to a broad set of users. Since
instructors often have different styles and preferences, we have attempted to include slides that
will accommodate different approaches and that can be adapted to classes with different levels of
preparation. For example, some instructors prefer to introduce the material before students have
read the chapter. We have tried to facilitate these types of introductory discussions by including
slides that replicate key points from the chapter. Other instructors expect students to have read
the chapter and attempted homework problems before coming to class. As a result, they may not
find it useful to review all of the topics in the chapter or to include slides that simply review
many of the details they expect students to study before class. However, instructors following
this approach often like to use sample exercises and problems built into the slides that allow
them to have extended discussions or to facilitate group interaction in class.
If instructors elect to spend two class periods on the same subject, they might find a combination
of both styles to be useful by first introducing foundational material before students have read
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the chapter and studied the topic, followed by an extended discussion the next class period after
students have read the chapter and attempted homework problems.

We have tried to develop slides that can facilitate a flexible approach to allow instructors to
select the slides that best match their objectives and style for class discussions. This is the reason
we are including over 100 slides for some chapters in the text. We do not expect all instructors to
use all slides, but the slide files should help support different teaching approaches and allow
instructors to select the subset of slides that best matches their specific discussion objectives.
The slides are organized by learning objective. We have included a slide at the beginning of each
learning objective to show where the new material begins. Instructors may or may not want to
use these learning objective slides in class. We provide them primarily as a way of organizing
the material. We also include short multiple choice questions at the end of most learning
objectives. Some instructors find it useful to pause periodically during class to assess students’
level of understanding. For this reason, we include several “practice quiz questions” that can be
used throughout class discussions to engage students, help them focus on key points, or to
facilitate group interaction. Finally, we provide longer exercises and problems that many
instructors find useful in assessing understanding and encouraging group learning.
In addition to the PowerPoint slides for the Chapter proper, we have also included a set of slides
which are a companion to Appendix 8A, which addresses the accounting for Intercompany
Indebtedness assuming straight line amortization rather than effective interest rate amortization
as used in the body of the chapter.
 Slides 3-5 provide a basic definition of direct and indirect intercompany debt
transfers.
LO 8-2 Prepare journal entries and consolidation entries related to direct intercompany debt
transfers.
 Slide 9 introduces the accounting for bond transfers directly to an affiliate when the
transfer is made at par value.
 Slide 10 provides a simple example of a bond transfer directly to an affiliate at par
value. The accounting for this scenario is very easy for students to understand. Thus,
it can easily be covered with just one slide.
 Slide 11 explains how the accounting differs if the bonds are issued directly to an
affiliate, but at a discount or premium.
 Slides 12-17 modify the fact pattern of the original example so that the bonds are
transferred at a discount.
 Slides 18 and 19 introduce the general concept of purchasing an affiliate’s bonds
from a non-affiliate.
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 Slide 23 explains how the accounting differs when bonds of an affiliate are purchased
from a nonaffiliate at an amount less than book value.
 Slides 24-55 (slides 24-52 in straight line file) provide a comprehensive example of
the accounting for bonds purchased from a nonaffiliate at an amount less than book
value. It follows the Peerless/Special Foods example presented in the chapter over
multiple years.
 Slide 59 (slide 56 in straight line file) explains how the accounting differs when
bonds of an affiliate are purchased from a nonaffiliate at an amount more than book
value.
 Slides 60-63 (slides 57-60 in straight line file) provide a comprehensive example of
the accounting for bonds purchased from a nonaffiliate at an amount more than book
value. It follows the Peerless/Special Foods example presented in the chapter over
multiple years.
TEACHING IDEAS
1. Students could be assigned to write a brief memo discussing why a company would
acquire the debt instruments of an affiliated company. What economic circumstances
would have to exist to make this a good business decision? Would the motivations differ
if the consolidated entity would report a loss on the constructive retirement of debt rather
than a gain?
2. Students could be asked to review the financial statements and financial statement notes
of a large consolidated entity and describe the nature of the company’s intercompany
debt and the type of disclosures made regarding the intercompany debt.
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DESCRIPTIONS OF CASES, EXERCISES, AND PROBLEMS
C8-1 Recognition of Retirement Gains and Losses

LO 8-4 In the situation presented, a parent purchases the bonds of a subsidiary from a
15 min. nonaffiliate and the subsidiary then retires the bonds. The recording processes
E used by the individual companies, timing of the recognition of a retirement gain
A or loss in the consolidated income statement, and assignment of income to
noncontrolling interest are discussed.
C8-2 Borrowing by Variable Interest Entities
LO 8-2 An entity finances its new building by establishing a joint venture, whereas it
15 min. holds none of the equity, but solely guarantees the debt. Students must
M investigate the applicable accounting rules and determine whether the entity may
R exclude this venture from its financial reports. A memorandum must be prepared
outlining the findings and including authoritative cites.
C8-3 Subsidiary Bond Holdings

LO 8-3 Intercompany corporate bond ownership exists between two subsidiaries.
40 min. Students must prepare a memorandum outlining the appropriate accounting and
M reporting from the perspective of the consolidated entity.
R
C8-4 Interest Income and Expense

LO 8-4 Students must explain the nature of several intercompany bond transactions and
30 min. explore their effect on consolidated financial statements.
M
U
C8-5 Intercompany Debt

LO 8-1, Students must explain the major problem that may arise from intercompany
LO 8-2 borrowing transactions.
30 min.
M
A
E8-1 Bond Sale from Parent to Subsidiary (Effective Interest Method)

LO 8-2 Journal entries for the parent and subsidiary and elimination entries at the end of
15 min. the first period of ownership are required following a direct placement of
E subsidiary bonds with the parent at a premium.
E8-1A Bond Sale from Parent to Subsidiary (Straight-Line Method)

LO 8-2 Journal entries for the parent and subsidiary and elimination entries at the end of
15 min. the first period of ownership are required following a direct placement of
E subsidiary bonds with the parent at a premium.
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E8-2 Computation of Transfer Price (Effective Interest Method)

LO 8-2 Given the interest accrual entry recorded by the parent on bonds purchased
10 min. directly from its subsidiary in an earlier period, the original purchase price, the
E current balance in the parent's investment account, and the elimination entries to
remove the effects of the intercorporate bond ownership are required.
E8-2A Computation of Transfer Price (Straight-Line Method)

LO 8-2 Given the interest accrual entry recorded by the parent on bonds purchased
10 min. directly from its subsidiary in an earlier period, the original purchase price, the
E current balance in the parent's investment account, and the elimination entries to
remove the effects of the intercorporate bond ownership are required.
E8-3 Bond Sale at Discount (Effective Interest Method)

LO 8-2 A parent purchases directly from its subsidiary a portion of a bond issue sold at a
15 min. discount. Consolidated interest expense, journal entries recorded on the bond
E issue by the parent, and the elimination entries needed to remove the effects of
the intercorporate bond ownership are required.
E8-3A Bond Sale at Discount (Straight-Line Method)

LO 8-2 A parent purchases directly from its subsidiary a portion of a bond issue sold at a
15 min. discount. Consolidated interest expense, journal entries recorded on the bond
E issue by the parent, and the elimination entries needed to remove the effects of
the intercorporate bond ownership are required.
E8-4 Evaluation of Intercorporate Bond Holdings (Effective Interest Method)

LO 8-3, A loss on bond retirement is reported in the consolidated income statement when
LO 8-4 the parent purchases subsidiary bonds from a nonaffiliate at par value. Students
15 min. must determine whether the bonds were issued at a premium or discount, whether
E annual interest payments by the subsidiary are more or less than the amount
reported as interest expense, and whether consolidated net income in the
following period will be increased or decreased when the intercorporate bond
holding is eliminated.
E8-5 Multiple-Choice Questions (Effective Interest Method) [AICPA Adapted]

LO 8-2, Six multiple-choice questions cover a constructive retirement of parent company
LO 8-3, bonds. The effect of the retirement on consolidated retained earnings and
LO 8-4 noncontrolling interest, interest income and interest expense recorded by the
15 min. companies, the amount of constructive loss on bond retirement, and consolidated
M net income for the period are considered.
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E8-5A Multiple-Choice Questions (Straight-Line Method) [AICPA Adapted]

LO 8-2, Four multiple-choice questions cover a constructive retirement of parent
LO 8-3, company bonds. The effect of the retirement on consolidated retained earnings
LO 8-4 and noncontrolling interest, interest income and interest expense recorded by the
15 min. companies, the amount of constructive loss on bond retirement, and consolidated
M net income for the period are considered.
E8-6 Multiple-Choice Questions (Effective Interest Method)

LO 8-2 Three multiple-choice questions cover a constructive retirement of subsidiary
15 min. bonds. Interest expense recorded by the companies, the amount of the gain on
M bond retirement, and income assigned to noncontrolling interest are computed.
E8-6A Multiple-Choice Questions (Straight-Line Method)

LO 8-2 Three multiple-choice questions cover a constructive retirement of subsidiary
15 min. bonds. Interest expense recorded by the companies, the amount of the gain on
M bond retirement, and income assigned to noncontrolling interest are computed.
E8-7 Constructive Retirement at End of Year (Effective Interest Method)

LO 8-2 Elimination entries in the period of a constructive bond retirement and the year
15 min. following are required. A gain results when the parent purchases subsidiary
M bonds at the end of the first period.
E8-7A Constructive Retirement at End of Year (Straight-Line Method)

15 min. following are required. A gain results when the parent purchases subsidiary
M bonds at the end of the first period.
E8-8 Constructive Retirement at Beginning of Year (Effective Interest Method)

15 min. following are required. A gain results when a parent purchases subsidiary bonds
M at the start of the first period.
E8-8A Constructive Retirement at Beginning of Year (Straight-Line Method)

15 min. following are required. A gain results when a parent purchases subsidiary bonds
M at the start of the first period.
E8-9 Retirement of Bonds Sold at a Discount (Effective Interest Method)

LO 8-3 Parent company bonds issued at a discount are purchased by a subsidiary from a
15 min. nonaffiliate seven years after the date of issue. A constructive loss is recognized.
M The elimination entry at the end of the year in which the subsidiary purchases the
bonds is required.
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E8-9A
LO 8-3
15 min.
M
Retirement of Bonds Sold at a Discount (Straight-Line Method)
Parent company bonds issued at a discount are purchased by a subsidiary from a nonaffiliate
seven years after the date of issue. A constructive loss is recognized. The elimination entry at the
end of the year in which the subsidiary purchases the bonds is required.
E8-10
LO 8-2
10 min.
M
Loss on Constructive Retirement (Effective Interest Method)
The elimination entries in the period of a constructive bond retirement are required when the
subsidiary purchases parent company bonds at the start of the period and a constructive loss is
recognized in the consolidated statements.
E8-10A
LO 8-2
10 min.
M
Loss on Constructive Retirement (Straight-Line Method)
The elimination entries in the period of a constructive bond retirement are required when the
subsidiary purchases parent company bonds at the start of the period and a constructive loss is
recognized in the consolidated statements.
E8-11
LO 8-2
15 min.
M
Determining the Amount of Retirement Gain or Loss (Effective Interest Method)

Given partial financial statement information for the parent and subsidiary, students are required
to compute interest expense to be reported in the consolidated income statement and the gain on
a constructive bond retirement. The entries to eliminate the effects of parent company ownership
of subsidiary bonds also are required.
E8-11A
LO 8-2
15 min.
M
Determining the Amount of Retirement Gain or Loss (Straight-Line Method)
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Given partial financial statement information for the parent and subsidiary, students are required
to compute interest expense to be reported in the consolidated income statement and the gain on
a constructive bond retirement. The entries to eliminate the effects of parent company ownership
of subsidiary bonds also are required.
E8-12
LO 8-3
25 min.
M
Evaluation of Bond Retirement (Effective Interest Method)
A constructive gain on bond retirement occurs when the parent purchases subsidiary bonds from
a nonaffiliate at mid-year. The amount of the gain or loss, where it is reported, the effect on
consolidated net income for the year, and the amount of income assigned to the noncontrolling
interest must be determined. Elimination entries at the end of the year of purchase and the year
following are required.
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E8-12A
LO 8-3
25 min.
M
A constructive gain on bond retirement occurs when the parent purchases subsidiary bonds from
a nonaffiliate at mid-year. The amount of the gain or loss, where it is reported, the effect on
consolidated net income for the year, and the amount of income assigned to the noncontrolling
interest must be determined. Elimination entries at the end of the year of purchase and the year
following are required.
E8-13
LO 8-4
20 min.
M
Loss on Constructive Retirement
A constructive loss on bond retirement occurs when the parent purchases subsidiary bonds from
a nonaffiliate. Elimination entries relating to the bonds at the end of the year of purchase and the
following year are required. Income to the noncontrolling interest in the year of purchase must be
computed.
E8-13A
LO 8-4
20 min.
M
A constructive loss on bond retirement occurs when the parent purchases subsidiary bonds from
a nonaffiliate. Elimination entries relating to the bonds at the end of the year of purchase and the
following year are required. Income to the noncontrolling interest in the year of purchase must be
computed.
P8-14
LO 8-2
50 min.
M
Consolidation Worksheet with Sale of Bonds to Subsidiary (Effective Interest Method)

Trial balances for the parent company and its partially-owned subsidiary are presented. Students
must prepare journal entries made by the parent company related to its equity investment and the
intercompany bonds, and by the subsidiary related to its investment in the parent’s bonds.
Students must also prepare elimination entries needed for consolidation and prepare a three-part
consolidated worksheet for the second year after the acquisition and issuance of the
intercompany bonds.
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P8-14A
LO 8-2
50 min.
M
Consolidation Worksheet with Sale of Bonds to Subsidiary (Straight-Line Method)

Trial balances for the parent company and its partially-owned subsidiary are presented. Students
must prepare journal entries made by the parent company related to its equity investment and the
intercompany bonds, and by the subsidiary related to its investment in the parent’s bonds.
Students must also prepare elimination entries needed for consolidation and prepare a three-part
consolidated worksheet for the second year after the acquisition and issuance of the
intercompany bonds.
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P8-15 Consolidation Worksheet with Sale of Bonds to Parent (Effective Interest

LO 8-2 Method)
50 min. Trial balances for the parent company and its partially-owned subsidiary are
M presented. Students must prepare journal entries made by the parent related to its
equity investment and the intercompany bonds, and by the subsidiary related to
the intercompany bonds. Students must also prepare elimination entries needed
for consolidation, and prepare a three-part consolidated work paper for the third
year after acquisition and issuance of the bonds.
P8-15A Consolidation Worksheet with Sale of Bonds to Parent (Straight-Line

LO 8-2 Method)
50 min. Trial balances for the parent company and its partially-owned subsidiary are
M presented. Students must prepare journal entries made by the parent related to its
equity investment and the intercompany bonds, and by the subsidiary related to
the intercompany bonds. Students must also prepare elimination entries needed
for consolidation, and prepare a three-part consolidated work paper for the third
year after acquisition and issuance of the bonds.
P8-16 Direct Sale of Bonds to Parent (Effective Interest Method)

LO 8-2 Trial balance information for the parent and subsidiary are provided following a
40 min. direct purchase of subsidiary bonds at a discount. Entries recorded by the parent
M and subsidiary, elimination entries, and a three-part consolidation worksheet at
the end of the period are required.
P8-16A Direct Sale of Bonds to Parent (Straight-Line Method)

LO 8-2 Trial balance information for the parent and subsidiary are provided following a
40 min. direct purchase of subsidiary bonds at a discount. Entries recorded by the parent
M and subsidiary, elimination entries, and a three-part consolidation worksheet at
the end of the period are required.
P8-17 Information Provided in Consolidation Entry (Effective Interest Method)

LO 8-3 The bond elimination entry is given two years after a purchase of bonds from a
25 min. nonaffiliate. The parent company must be identified, the proportion of subsidiary
M ownership held by the parent, amount paid to acquire the bonds, the constructive
gain or loss recognized at the date of purchase, consolidated net income
considering the elimination entry, and the amount of income assigned to the
noncontrolling interest in the current year must be determined. The bond
elimination entry at the end of the following year must be prepared.
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P8-17A Information Provided in Consolidation Entry (Straight-Line Method)

LO 8-3 The bond elimination entry is given two years after a purchase of bonds from a
25 min. nonaffiliate. The parent company must be identified, the proportion of subsidiary
M ownership held by the parent, amount paid to acquire the bonds, the constructive
gain or loss recognized at the date of purchase, consolidated net income
considering the elimination entry and the amount of income assigned to the
noncontrolling interest in the current year must be determined. The bond
elimination entry at the end of the following year must be prepared.
P8-18 Prior Retirement of Bonds (Effective Interest Method)

LO 8-4 The bond elimination entry is given for the year after subsidiary company bonds
25 min. were purchased by the parent. The amount paid to acquire the bonds must be
M determined, journal entries made by the parent to record interest income and the
subsidiary to record interest expense must be recorded, the bond elimination
entry for the prior year must be prepared, and consolidated net income and
income to controlling interest for the prior and current years must be computed.
P8-18A Prior Retirement of Bonds (Straight-Line Method)

LO 8-4 The bond elimination entry is given for the year after subsidiary company bonds
25 min. were purchased by the parent. The amount paid to acquire the bonds must be
M determined, journal entries made by the parent to record interest income and the
subsidiary to record interest expense must be recorded, the bond elimination
entry for the prior year must be prepared, and consolidated net income and
income to controlling interest for the prior and current years must be computed.
P8-19A Incomplete Data (Straight-Line Method)

LO 8-2 An incomplete bond elimination entry is provided. The price paid to purchase the
15 min. bonds, the carrying amount of the bonds on the subsidiary's books, and income
H assigned to the noncontrolling interest for the period are computed.
P8-20 Balance Sheet Consolidations (Effective Interest Method)

LO 8-4 Elimination entries, a consolidated balance sheet worksheet, and a consolidated
35 min. balance sheet are required. The parent purchased subsidiary bonds from a
H nonaffiliate at the start of the preceding year.
P8-20A Balance Sheet Consolidations (Straight-Line Method)

LO 8-4 Elimination entries, a consolidated balance sheet worksheet, and a consolidated
35 min. balance sheet are required. The parent purchased subsidiary bonds from a
H nonaffiliate at the start of the preceding year.
P8-21 Computations Relating to Bond Purchase from Nonaffiliate (Effective

LO 8-4 Interest Method)
30 min. Partial trial balance data is given at the end of the period. The purchase price of
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Education.
M subsidiary bonds and the gain on constructive retirement are computed and the
elimination entries relating to the intercorporate bond ownership are required.
P8-21A Computations Relating to Bond Purchase from Nonaffiliate (Straight-Line

LO 8-4 Method)
30 min. Partial trial balance data is given at the end of the period. The purchase price of
M subsidiary bonds and the gain on constructive retirement are computed and the
elimination entries relating to the intercorporate bond ownership are required.
P8-22A Computations following Parent's Acquisition of Subsidiary Bonds (Straight-

LO 8-2 Line Method)
25 min. A determination of the gain on bond retirement, the elimination entry to remove
M the effects of intercorporate bond ownership, and the balance of consolidated
retained earnings are required. Partial financial statement information is given at
the end of the period following a purchase of subsidiary bonds from a
nonaffiliate.
P8-22B Computations following Parent's Acquisition of Subsidiary Bonds (Effective

LO 8-2 Interest Method)
25 min. A determination of the gain on bond retirement, the elimination entry to remove
M the effects of intercorporate bond ownership, and the balance of consolidated
retained earnings are required. Partial financial statement information is given at
the end of the period following a purchase of subsidiary bonds from a
nonaffiliate.
P8-23 Consolidation Worksheet—Year of Retirement (Effective Interest Method)

LO 8-2 A consolidation worksheet and consolidated financial statements are required.
45 min. The parent has acquired subsidiary bonds from a nonaffiliate at the end of the
M current period.
P8-23A Consolidation Worksheet—Year of Retirement (Straight-Line Method)

M current period.
P8-24 Consolidation Worksheet—Year after Retirement (Effective Interest

LO 8-4 Method)
45 min. A consolidation worksheet and consolidated financial statements are required.
M The parent has acquired subsidiary bonds from a nonaffiliate at the end of the
prior period with a constructive loss occurring.
P8-24A Consolidation Worksheet—Year after Retirement (Straight-Line Method)

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Education.
M prior period with a constructive loss occurring.
P8-25 Intercorporate Inventory and Debt Transfers (Effective Interest Method)

LO 8-3 Trial balance data for the parent and subsidiary are provided. Unrealized
50 min. upstream inventory profits are present at the beginning of the year and
H downstream profits are present at the end of the year. A constructive gain on the
purchase of subsidiary bonds was reported two years earlier. The amounts
reported as consolidated cost of goods sold, inventory, and income to the
noncontrolling interest must be computed. Also, journal entries to record interest
expense by subsidiary and interest income by parent must be computed.
Elimination entries and a consolidation worksheet must be prepared.
P8-25A Intercorporate Inventory and Debt Transfers (Straight-Line Method)
LO 8-3 Trial balance data for the parent and subsidiary are provided. Unrealized
50 min. upstream inventory profits are present at the beginning of the year and
H downstream profits are present at the end of the year. A constructive gain on the
purchase of subsidiary bonds was reported two years earlier. The amounts
reported as consolidated cost of goods sold, inventory, and income to the
noncontrolling interest must be computed. Also, journal entries to record interest
expense by subsidiary and interest income by parent must be computed.
Elimination entries and a consolidation worksheet must be prepared.
P8-26 Intercorporate Bond Holdings and Other Transfers (Effective Interest
LO8-4 Method)
50 min. Balance sheet and income statement data for the parent and subsidiary are
H provided. A downstream sale of depreciable assets occurred in the prior year, an
upstream sale of land occurred three years earlier, and a constructive loss on the
purchase of subsidiary bonds was reported in the prior year. Elimination entries
and a three-part consolidation worksheet are required.
P8-26A Intercorporate Bond Holdings and Other Transfers (Straight-Line Method)
LO8-4 Balance sheet and income statement data for the parent and subsidiary are
50 min. provided. A downstream sale of depreciable assets occurred in the prior year, an
H upstream sale of land occurred three years earlier, and a constructive loss on the
purchase of subsidiary bonds was reported in the prior year. Elimination entries
and a three-part consolidation worksheet are required.
P8-27B Comprehensive Multiple-Choice Questions (Modified Equity Method)
LO 8-3, Ten multiple-choice questions have been developed to cover the major
LO 8-4 computations involved when a differential assigned to buildings and to goodwill
50 min. exists, unrealized inventory profits exist at both the beginning and end of the
H period, and the parent purchases subsidiary bonds at the start of the current
period at a loss.
P8-28 Comprehensive Problem: Intercorporate Transfers (Effective Interest

LO 8-2, Method)
LO 8-3 Intercorporate bonds and inventory transactions are presented within a
60 min. comprehensive problem. Students must determine the appropriate goodwill, the
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Education.
H value of the investment account, and the gain or loss on the constructive
retirement of the bonds. The noncontrolling interest's share of income and net
assets must also be computed. After these computations, students are then asked
to prepare the elimination entries and the three-part consolidation worksheet for
the parent and its 90 percent-owned subsidiary.
P8-28A Comprehensive Problem: Intercorporate Transfers (Straight-Line Method)

LO 8-3, Intercorporate bonds and inventory transactions are presented within a
LO 8-4 comprehensive problem. Students must determine the appropriate goodwill, the
60 min. value of the investment account, and the gain or loss on the constructive
H retirement of the bonds. The noncontrolling interest's share of income and net
assets must also be computed. After these computations, students are then asked
to prepare the elimination entries and the three-part consolidation worksheet for
the parent and its 90 percent-owned subsidiary.
P8-29B Comprehensive Problem: Intercorporate Transfers (Modified Equity

LO 8-2, Method)
LO 8-3 An adjusted trial balance, journal entries recorded on the parent's books under the
60 min. modified equity method, elimination entries, and a consolidation worksheet are
H required. Differences in the consolidation process between the basic equity
method and the modified equity method are clearly illustrated by working both
P8-28A and P8-29B.
P8-30B Cost Method

60 min. Revised trial balance totals for the parent company are presented to convert P8-
H 24 to the cost method. The journal entries recorded by the parent under the cost
method, elimination entries, and a consolidation worksheet are required.
Differences in the consolidation process between the basic equity method and the
cost method are clearly illustrated by working both P8-24 and P8-30B.
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Education.

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Chapter 08 - INTERCOMPANY INDEBTEDNESS

Chapter 8 illustrates the consolidation procedures needed to eliminate the financial

purchased from a nonaffiliate at an amount less than book value.

Caesars Entertainment Corporation’s Debt Transfers

Bond Sale Directly to an Affiliate

Bonds of Affiliate Purchased from a Nonaffiliate

Purchase at an Amount Less than Book Value

Purchase at an Amount Higher than Book Value

Appendix 8A: Intercompany Indebtedness—Fully Adjusted Equity Method

Bond Investment Entries—20X1

Appendix 8B: Intercompany Indebtedness—Modified Equity Method and Cost Method

NOTES ON POWERPOINT SLIDES

DESCRIPTIONS OF CASES, EXERCISES, AND PROBLEMS

C8-1 Recognition of Retirement Gains and Losses

C8-3 Subsidiary Bond Holdings

C8-4 Interest Income and Expense

C8-5 Intercompany Debt

E8-1 Bond Sale from Parent to Subsidiary (Effective Interest Method)

E8-1A Bond Sale from Parent to Subsidiary (Straight-Line Method)

E8-2 Computation of Transfer Price (Effective Interest Method)

E8-2A Computation of Transfer Price (Straight-Line Method)

E8-3 Bond Sale at Discount (Effective Interest Method)

E8-3A Bond Sale at Discount (Straight-Line Method)

E8-4 Evaluation of Intercorporate Bond Holdings (Effective Interest Method)

E8-5 Multiple-Choice Questions (Effective Interest Method) [AICPA Adapted]

E8-5A Multiple-Choice Questions (Straight-Line Method) [AICPA Adapted]

E8-6 Multiple-Choice Questions (Effective Interest Method)

E8-6A Multiple-Choice Questions (Straight-Line Method)

E8-7 Constructive Retirement at End of Year (Effective Interest Method)

E8-7A Constructive Retirement at End of Year (Straight-Line Method)

E8-8 Constructive Retirement at Beginning of Year (Effective Interest Method)

E8-8A Constructive Retirement at Beginning of Year (Straight-Line Method)

E8-9 Retirement of Bonds Sold at a Discount (Effective Interest Method)

Determining the Amount of Retirement Gain or Loss (Effective Interest Method)

Determining the Amount of Retirement Gain or Loss (Straight-Line Method)

Consolidation Worksheet with Sale of Bonds to Subsidiary (Effective Interest Method)

Consolidation Worksheet with Sale of Bonds to Subsidiary (Straight-Line Method)

P8-15 Consolidation Worksheet with Sale of Bonds to Parent (Effective Interest

P8-15A Consolidation Worksheet with Sale of Bonds to Parent (Straight-Line

P8-16 Direct Sale of Bonds to Parent (Effective Interest Method)

P8-16A Direct Sale of Bonds to Parent (Straight-Line Method)

P8-17 Information Provided in Consolidation Entry (Effective Interest Method)

P8-17A Information Provided in Consolidation Entry (Straight-Line Method)

P8-18 Prior Retirement of Bonds (Effective Interest Method)

P8-18A Prior Retirement of Bonds (Straight-Line Method)

P8-19A Incomplete Data (Straight-Line Method)

P8-20 Balance Sheet Consolidations (Effective Interest Method)

P8-20A Balance Sheet Consolidations (Straight-Line Method)

P8-21 Computations Relating to Bond Purchase from Nonaffiliate (Effective

P8-21A Computations Relating to Bond Purchase from Nonaffiliate (Straight-Line

P8-22A Computations following Parent's Acquisition of Subsidiary Bonds (Straight-

P8-22B Computations following Parent's Acquisition of Subsidiary Bonds (Effective

P8-23 Consolidation Worksheet—Year of Retirement (Effective Interest Method)

P8-23A Consolidation Worksheet—Year of Retirement (Straight-Line Method)

P8-24 Consolidation Worksheet—Year after Retirement (Effective Interest

P8-24A Consolidation Worksheet—Year after Retirement (Straight-Line Method)

M prior period with a constructive loss occurring.

P8-25 Intercorporate Inventory and Debt Transfers (Effective Interest Method)