Chapter 7 Advanced Accounting Test Bank

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Chapter 7 advanced accounting test bank
Pengantar Akuntansi I (Universitas Katolik Indonesia Atma Jaya)
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Advanced Accounting, 12e (Beams et al.)

Chapter 7 Intercompany Profit Transactions – Bonds
7.1 Multiple Choice Questions
1) 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 retirement of debt from the viewpoint of the subsidiary
B) realized gain on the retirement of debt from the viewpoint of the subsidiary
C) constructive loss on the retirement of debt from the viewpoint of the consolidated entity
D) constructive gain on the retirement of debt from the viewpoint of the consolidated entity
Answer: C
Objective: LO1
Difficulty: Easy
2) If an affiliate purchases bonds in the open market, the book value of the intercompany bond
liability at the time of purchase is
A) always assigned to the parent company because it has control.
B) the par value of the bonds less the unamortized discount 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: B
Objective: LO1
Difficulty: Easy
3) Bonds issued by a company remain on their books as a liability, but are considered
constructively retired when
A) the 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 company’s parent or subsidiary purchases the bonds from outside entities.
D) The company borrows money from an affiliate to repurchase its own bonds at a gain or at a
loss.
Answer: C
Objective: LO1
Difficulty: Easy
Use the following information to answer the question(s) below.
Pascalian Company owns a 90% interest in Sapp Company. On January 1, 2013, Pascalian had
$300,000, 6% bonds outstanding with an unamortized premium of $9,000. The bonds mature on
December 31, 2017. Sapp acquired one-third of Pascalian’s bonds in the open market for
$97,000 on January 1, 2013. Both companies use straight-line amortization of bond
discounts/premiums. Interest is paid on December 31. On December 31, 2013, the books of the
two affiliates held the following balances:
Pascalian’s books
6% bonds payable $300,000
Premium on bonds 7,200
Interest expense 16,200
Sapp’s books
Investment in Pascalian bonds $ 97,600
Interest income 6,600
4) The gain from the bond purchase that appeared on the December 31, 2013 consolidated
income statement was

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A) $4,320.
B) $4,800.
C) $5,400.
D) $6,000.
Answer: D
Explanation: D) Book value of Pascalian’s bonds
acquired by Sapp equals 1/3
times ($300,000 + $9,000) $103,000
Less: Cost of acquiring
Pascalian bonds ( 97,000)
Constructive gain on bonds $ 6,000
Objective: LO2
Difficulty: Moderate
5) Consolidated Interest Expense and consolidated Interest Income, respectively, that appeared
on the consolidated income statement for the year ended December 31, 2013 was
A) $10,800 and $0.
B) $10,800 and $6,600.
C) $0 and $0.
D) $16,200 and $6,600.
Answer: A
Explanation: A) Consolidated interest expense =
$16,200 × 2/3 $10,800
Objective: LO2
6) Prussia Corporation owns 80% the voting stock of Stad Corporation. On January 1, 2013,
Prussia paid $391,000 cash for $400,000 par of Stad’s 10% $1,000,000 par value outstanding
bonds, due on April 1, 2018. Stad’s bonds had a book value of $1,045,000 on January 1, 2013.
Straight-line amortization is used. The gain or loss on the constructive retirement of $400,000 of
Stad bonds on January 1, 2013 was reported in the 2013 consolidated income statement in the
amount of
A) $14,000.
B) $21,600.
C) $23,000.
D) $27,000.
Answer: D
Objective: LO2
Pfadt Inc. had $600,000 par of 8% bonds payable outstanding on January 1, 2013 due January
1, 2017 with an unamortized discount of $12,000. Senat is a 90%-owned subsidiary of Pfadt. On
January 2, 2013, Senat Corporation purchased $150,000 par value of Pfadt’s 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 2013 showed a gain or loss of
A) $ 4,500.
B) $ 5,000.
C) $10,800.
D) $12,000.
Answer: B
Explanation: B) [($588,000 × 0.25) -$152,000]
Objective: LO2

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8) Bond Interest Receivable for 2013 of Pfadt’s bonds on Senat’s books was
A) $5,400.
B) $6,000.
C) $10,800.
D) $12,000.
Answer: B
Explanation: B) [$150,000 × 8% × 1/2]
Objective: LO2
9) Bonds Payable appeared in the December 31, 2013 consolidated balance sheet of Pfadt
Corporation and Subsidiary in the amount of
A) $398,925.
B) $441,000.
C) $443,250.
D) $450,000.
Answer: C
Explanation: C) [$591,000 × 75%]
Objective: LO2
Plenty Corporation issued six thousand, $1,000 par, 6% bonds on January 1, 2012, at par.
Interest is paid on January 1 and July 1 of each year; the bonds mature on January 1, 2017. On
January 2, 2014, Scrawn Corporation, a 75%-owned subsidiary of Plenty, purchased 3,000 of the
bonds on the open market at 102.50. Plenty’s separate net income for 2014 included the annual
interest expense for all 3,000 bonds. Scrawn’s separate net income for 2014 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 straight-line amortization of bond
discounts/premiums.
10) What was the amount of gain or (loss) from the intercompany purchase of Plenty’s bonds on
January 2, 2014?
A) $(56,250)
B) $(75,000)
C) $ 75,000
D) $ 56,250
Answer: B
Explanation: B) Total book value acquired =
$6,000,000 × 50% $3,000,000
Purchase price 3,000 × $1,025 3,075,000
Loss on constructive retirement $ 75,000
Objective: LO2
11) If the bonds were originally issued at 106, and 80% of them were purchased by Scrawn on
January 2, 2015 at 98, the gain or (loss) from the intercompany purchase was
A) $(384,000).
B) $(211,200).
C) $ 211,200.
D) $ 384,000.
Answer: C
Explanation: C) Book value at January 2, 2015 equals
$6,360,000 minus $216,000 = $6,144,000
Percentage of bonds acquired 80%
Equals book value acquired 4,915,200
Purchase price 4,800 bonds × $980 = 4,704,000

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Gain on constructive retirement = $ 211,200

Objective: LO2
12) If the bonds were originally issued at 103, and 70% of them were purchased on January 2,
2016 at 104, the constructive gain or (loss) on the purchase was
A) $(142,800).
B) $( 42,000).
C) $ 42,000.
D) $ 142,800.
Answer: A
Explanation: A) Book value at January 2, 2016 equals
$6,180,000 minus $144,000 $6,036,000
Percentage of bonds acquired 70%
Equals book value acquired 4,225,200
Purchase price 4,200 bonds × $1,040 4,368,000
Loss on constructive retirement $ 142,800
Objective: LO2
13) Using the original information, the amount of consolidated Interest Expense for 2014 was
A) $ 135,000.
B) $ 180,000.
C) $ 270,000.
D) $ 360,000.
Answer: B
Explanation: B) ($6,000,000 – $3,000,000) × 6%
Objective: LO2
14) Using the original information, the balances for the Bonds Payable and Bond Interest
Payable accounts, respectively, on the consolidated balance sheet for December 31, 2015 were
A) $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: A
Explanation: A) Bonds payable $6,000,000 minus bonds held by Scrawn of $3,000,000. Interest
accrued on December 31, 2015 will be the interest on bonds held by non-affiliates or $3,000,000
× 6% × 1/2 year
Objective: LO2, 3
15) Using the original information, the elimination entries on the consolidation working papers
prepared on December 31, 2014 included at least
A) debit to Bond Interest Expense for $360,000.
B) credit to Bond Interest Expense for $180,000 and 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: B
Objective: LO2
16) No constructive gain or loss arises from the purchase of an affiliate’s bonds if the
A) affiliate is a 100%-owned subsidiary.
B) bonds are purchased at book value.
C) bonds are purchased with arm’s-length bargaining from outside entities.
D) gain or loss cannot be reasonably estimated.

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Answer: B
Objective: LO1
Difficulty: Easy
17) There are several theories for allocating constructive gains or losses between purchasing
and issuing affiliates. The Agency Theory
A) 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 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: D
Objective: LO1
Difficulty: Easy
18) Pickle Incorporated acquired a $10,000 bond originally issued by its 80%-owned subsidiary
on January 2, 2013. The bond was issued in a prior year for $11,250, matures January 1, 2018,
and pays 9% interest at December 31. The bond’s book value at January 2, 2013 is $10,625,
and Pickle paid $9,500 to purchase it. Straight-line amortization is used by both companies. How
much interest income should be eliminated in 2013?
A) $720
B) $800
C) $900
D) $1,000
Answer: D
Explanation: D) $9,500 – $10,000 = discount to amortize as interest expense over 5 years, or
$100 per year + $900 paid by issuer.
Objective: LO2, 3
Poe Corporation owns an 80% interest in Seri Company acquired at book value several years
ago. On January 2, 2013, Seri purchased $100,000 par of Poe’s outstanding 10% bonds for
$103,000. The bonds were issued at par and mature on January 1, 2016. Straight-line
amortization is used. Separate incomes of Poe and Seri for 2013 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 2013 was
A) $443,600.
B) $444,000.
C) $444,400.
D) $448,000.
Answer: B
Explanation: B) Poe’s separate income $ 350,000
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: LO4
20) Noncontrolling interest share for 2013 was

A) $23,000.
B) $23,600.

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C) $24,000.
D) $24,400.
Answer: C
Explanation: 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: LO4
7.2 Exercises
1) Separate company and consolidated income statements for Pitta and Sojourn Corporations for
the year ended December 31, 2013 are summarized as follows:
Pitta Soujourn Consolidated

Sales Revenue $ 500,000 $ 100,000 $ 600,000
Income from Sojourn 19,900
Bond interest income 6,000
Gain on bond retirement 3,000
Total revenues 519,900 106,000 603,000
Cost of sales $ 280,000 $ 50,000 $ 330,000

Bond interest expense 9,000 3,600
Other expenses 120,900 31,000 151,900
Total expenses 409,900 81,000 485,500
Consolidated net income 117,500
Noncontrolling interest share 7,500
Separate net income and
Control. interest share in
consolidated net income $ 110,000 $ 25,000 $ 110,000
The interest income and expense eliminations relate to a $100,000, 9% bond issue that was
issued at par value and matures on January 1, 2018. On January 2, 2013, a portion of the bonds
was purchased and constructively retired.
Required: Answer the following questions.

1. Which company is the issuing 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 2013?
3. What portion of the bonds payable is held by nonaffiliates at December 31, 2013?
4. Is Sojourn a wholly-owned subsidiary? If not, what percentage does Pitta own?
5. Does the purchasing affiliate use straight-line or effective interest amortization?
6. Explain the calculation of Pitta’s $19,900 income from Sojourn.
Answer: 1. Pitta is the issuing affiliate.
2. Effect on consolidated net income:

Gain on constructive retirement of bonds $ 3,000
3. Percent of bonds held by nonaffiliates at December 31, 2013 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 noncontrolling interest share divided by $25,000 income of Sojourn =
30% noncontrolling interest.)
5. Straight-line amortization

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$100,000 par × 60% purchased $60,000

Purchase price 5 years before maturity 57,000
Gain 3,000
Nominal interest ($60,000 × 9%) $ 5,400

Discount amortization ($3,000/5 years) 600
Bond interest income $ 6,000
6. Pitta’s income from Sojourn
Share of Sojourn’s reported income

($25,000 × 70%) = $17,500
Add: Constructive gain 3,000
Less: Piecemeal recognition of constructive
gain (600)
Income from Sojourn $19,900
Objective: LO1, 2, 4
2) Platts Incorporated purchased 80% of Scarab Company several years ago when the fair value
equaled the book value. On January 1, 2013, 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 premium or discount
incurred in the issuance or purchase of bonds. On January 1, 2014, Platts purchased all of
Scarab’s bonds for $96,000.
Required:
1. Prepare the journal entries in 2014 that would be recorded by Platts and Scarab on their
separate financial records.
2. Prepare the consolidating working paper entries required for the year ending December 31,
2014.
Answer:
Requirement 1:
Platts entries:
1/1/14 Investment in bonds $96,000
Cash $96,000
12/31/14 Cash 8,000

Investment in bonds 1,000

Scarab entries:
12/31/14 Interest expense 8,000
Cash 8,000
Requirement 2:
Consolidating entries:
12/31/14 Bonds payable 100,000
Investment in bonds 97,000
Gain on retirement of debt 3,000

Gain on retirement of debt 1,000
Objective: LO2, 3

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3) Paka Corporation owns an 80% interest in Sandra Company. Paka acquired Sandra’s bonds
on January 2, 2014. The following information is from the adjusted trial balances at December
31, 2014, 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 Sandra Bonds, $100,000 par 98,500
7% Bonds payable, $200,000 200,000
Bond premium 6,000
Interest receivable 7,000
Interest payable 7,000
Required:
Prepare the necessary consolidation working paper entries on December 31, 2014 with respect
to the intercompany bonds.
Answer: 2014 Debit Credit
12/31 Bond Interest Payable 7,000
Bond Interest Receivable 7,000
12/31 Bonds Payable 100,000
Interest Income 7,500
Bond premium 3,000
Interest Expense (50% owned) 6,000
Investment in Sandra’s Bonds 98,500
Gain on retirement of bonds 6,000
Supporting Computations:
Cost of bonds to Paka ($98,500 – $500) $98,000

Book value acquired 1/1/2014 where
$2,000 per year is amortized
($200,000 + $8,000) × 50% = 104,000
Gain on constructive bond retirement $6,000
Objective: LO2, 3
4) Pheasant Corporation owns 80% of Sal Corporation’s outstanding common stock that was
purchased at book value equal to fair value on January 1, 2007.
Additional information:
1. Pheasant sold inventory items that cost $3,000 to Sal during 2014 for $6,000. One-half of this
merchandise was inventoried by Sal at year-end. At December 31, 2014, Sal owed Pheasant
$2,000 on account from the inventory sales. No other intercompany 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, 2012. The equipment remains in use by Sal and is depreciated by the
straight-line method. The equipment has no salvage value.
3. On January 2, 2014, Sal paid $10,800 for $10,000 par value of Pheasant’s 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, 2018. 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.

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Required:
Complete the working papers to consolidate the financial statements of Pheasant Corporation
and Sal for the year ended December 31, 2014.
Answer:
Objective: LO2, 3
Difficulty: Difficult
5) Phauna paid $120,000 for its 80% interest in Schrub on January 1, 2011 when Schrub had
$150,000 of total stockholders’ equity.
On January 1, 2014, Phauna purchased $50,000 of Schrub Corporation’s 8% bonds for $48,000.
At that time, $100,000 of bonds had been issued by Schrub, and unamortized premium was
$2,000. The bonds pay interest on June 30 and December 31 and mature on December 31,
2018. Both Phauna and Schrub use straight-line amortization. Phauna uses the equity method of
accounting for its investment in Schrub.
Required:
Prepare eliminating/adjusting entries for the bonds on the consolidating work papers for the year
ended December 31, 2014.
Answer: 12/31/2014
Interest income (8% × $50,000) + ($2,000/5) 4,400
Interest expense(8% × $50,000) – ($1,000/5) 3,800
Gain on retirement of bonds 600
Bonds payable 50,000

Premium on bonds payable 800
Bond investment 48,400
Premium on bonds payable:

$1,000 – $1,000/5 = $800
Bond investment:
$48,000 + $2,000/5 = $48,400
Supporting computations:
Book value of bonds
($102,000 × 50%) $51,000
Cost of acquiring $50,000 par (48,000)
Constructive gain 3,000
Piecemeal recognition of gain (600)
Unrecognized at December 31, 2014 $ 2,400
Objective: LO2, 3
Difficulty: Difficult
6) Pelami Corporation owns a 90% interest in Sunbird Corporation. At December 31, 2012,
Sunbird had $3,000,000 of par value 6% bonds outstanding with an unamortized premium of
$30,000. The bonds have interest payment dates of January 1 and July 1 and mature on January
1, 2017.
On January 2, 2013, Pelami purchased $1,200,000 par value of Sunbird’s outstanding bonds for
$1,210,000. Assume straight-line amortization.
Required:
Prepare the necessary consolidation working paper entries with respect to the intercompany
bonds for the year ending December 31, 2013.

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Answer: 2013 Debit Credit

12/31 Bond Interest Payable 36,000
12/31 Premium on Bonds Payable 9,000

Bonds Payable 1,200,000
Interest Revenue 69,500
Interest Expense 69,000
Investment in Sunbird Bonds 1,207,500
Gain on Retirement of Bonds 2,000
Supporting Computations:
Cost of bonds to Pelami $1,210,000
Book value acquired
($3,000,000 + $30,000) × 40% = 1,212,000
Gain on constructive bond retirement $2,000
4 years remaining
Premium on Bond Payable
$30,000 × 3/4 × 40% = $9,000
Interest Expense
$1,200,000 × 6% = $ 72,000
Less: $30,000 × 1/4 × 40% = $ 3,000
$ 69,000
Interest Revenue
$72,000 – ($10,000 × 1/4) = $69,500
Objective: LO2, 3
7) Spott is a 75%-owned subsidiary of Penthal. On January 1, 2013, Spott issued $900,000 of
$1,000 face amount 8% bonds at par. The bonds have interest payments on January 1 and July
1 of each year and mature on January 1, 2017. On July 2, 2014, Penthal purchased all 900
bonds on the open market for $1,020 per bond. Both companies use straight-line amortization.
Required: With respect to the bonds, use General Journal format to:
1. Record the 2014 journal entries from July 1 to December 31 on Spott’s books.
2. Record the 2014 journal entries from July 1 to December 31 on Penthal’s books.
3. Record the elimination entries for the consolidation working papers for the year ending
December 31, 2014.
Answer:
Requirement 1
Date
2014 Account Name Debit Credit
Spott’s books
Jul 01 Bond Interest Expense 36,000
Cash ($900,000 × 8% × ½) 36,000
Dec 31 Bond Interest Expense 36,000

Bond Interest Payable 36,000
Requirement 2
Penthal’s books
Jul 02 Investment in Spott Bonds 918,000
Cash 918,000

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Dec 31 Bond Interest Receivable 36,000

Bond Interest Revenue 32,400
Investment in Spott Bonds 3,600
Requirement 3: Consolidated Working Papers

Dec 31 Bond Interest Payable 36,000
Dec 31 Bonds Payable 900,000

Loss on Bonds 18,000
Bond Interest Expense 36,000
Investment in Spott Bonds 914,400
Interest Revenue:
($900,000 × 8% × 1/2) – ($18,000 premium/5 periods) = $32,400
Objective: LO2, 3
8) Snackle Inc. is a 90%-owned subsidiary of Pasha Corp. On January 1, 2013, Snackle issued
$400,000 of $1,000 face amount 8% bonds at $964 per bond. Interest is paid on January 1 and
July 1 of each year and covers the preceding six months. On July 2, 2014, Pasha purchased all
400 bonds on the open market for $1,030 per bond. The bonds mature on December 31, 2015.
Both companies use straight-line amortization.
1. Record the 2014 journal entries from July 1 to December 31 on Pasha’s books.
2. Record the 2014 journal entries from July 1 to December 31 on Snackle’s books.
3. Record the elimination entries for the consolidation working papers for the year ending
December 31, 2014.
Answer: Date
2014 Account Name Debit Credit
Pasha’s books
Jul 02 Investment in Snackle Bonds 412,000
Cash 412,000
Dec 31 Bond Interest Receivable 16,000

Investment in Snackle Bonds 4,000
Snackle’s books
Jul 01 Bond Interest Expense 18,400
Cash 16,000
Discount on Bonds Payable 2,400
Dec 31 Bond Interest Expense 18,400

Bond Interest Payable 16,000
Consolidated Working Papers

Dec 31 Bond Interest Payable 16,000
Dec 31 Bonds Payable 400,000

Loss on Bonds 19,200
Bond Interest Expense 18,400

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Investment in Snackle Bonds 408,000
(Book value of bonds $392,800 – purchase cost $412,000 = $19,200 loss)

Objective: LO2, 3
9) Popcorn Corporation owns 90% of the outstanding voting common stock of Salty Corporation.
On January 1, 2009, Salty issued $1,000,000 face amount of 12%, $1,000 bonds payable at
119.20. The bonds pay interest on January 1 and July 1 of each year and mature on January 1,
2017. On July 2, 2014, Popcorn purchased all of the outstanding bonds at a price of 107.50.
Both companies use straight-line amortization.
Required:
1. Prepare the journal entries for July 1, 2014 through December 31, 2014 for Popcorn
Corporation.
2. Prepare the journal entries for July 1, 2014 through December 31, 2014 for Salty Corporation.
3. Prepare the elimination entries necessary on the consolidating working papers for the year
ended December 31, 2014.
Answer:
Requirement 1
July 2, 2014:
Bond investment 1,075,000
Cash 1,075,000
December 31, 2014:

Interest revenue 60,000
($1,000,000 × 12% × 1/2)

($75,000/5)
Requirement 2
July 1, 2014:
Cash 60,000
Premium on bonds payable 12,000

December 31, 2014:

($1,000,000 × 12% × 1/2)

Requirement 3:
December 31, 2014:
Bonds payable 1,000,000
Loss on retirement of bonds 12,000
Bond investment:($1,075,000 – $15,000)

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July 2, 2014
Paid $1,075,000
Book value of bonds 1,060,000 [$1,000,000 + ($12,000 × 5)]
Loss on retirement $15,000
Objective: LO2, 3
10) Peter Corporation owns a 70% interest in Sundown Corporation acquired several years ago
at a price equal to book value and fair value. On December 31, 2013, Sundown had $300,000
par of 6% bonds outstanding with an unamortized premium of $30,000. The bonds mature in five
years and pay interest on January 1 and July 1. On January 2, 2014, Peter acquired one-third of
Sundown’s bonds for $117,000. Peter and Sundown use straight-line amortization. Sundown
reports net income of $250,000 for 2014. Peter uses the equity method to account for the
investment.
Required:
1. Calculate Peter’s income from Sundown for 2014.
2. Calculate the noncontrolling interest share for 2014.
Answer: Preliminary computations:
Book value of bonds $330,000 × 1/3 = $110,000
Cost of bonds 117,000
Loss on constructive retirement $7,000
Requirement 1:
Income from Sundown:
Share of Sundown’s income ($250,000 × 70%) $175,000
Less: Constructive loss ($7,000 × 70%) (4,900)
Plus: Piecemeal recognition of loss
($7,000/5 years) × 70% 980
Income from Sundown $171,080
Requirement 2:
Noncontrolling interest share:
Sundown’s reported income $250,000
Less: Constructive loss on bonds (7,000)
Plus: Piecemeal recognition of loss 1,400
Equals: Adjusted reported income $244,400
Noncontrolling percentage 30%
Noncontrolling interest share $73,320
Objective: LO3, 4
11) Pongo Company has $2,000,000 of 6% bonds outstanding on December 31, 2013 with
unamortized premium of $60,000. These bonds pay interest semiannually on January 1 and July
1 and mature on January 1, 2019. Straight-line amortization is used.
Syring Inc., 90%-owned subsidiary of Pongo, buys $1,000,000 par value of Pongo’s outstanding
bonds in the market for $980,000 on January 2, 2014. There is only one issue of outstanding
bonds of the affiliated companies and they have consolidated financial statements.
For the year 2014, Pongo has income from its separate operations (excluding investment

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income) of $3,000,000 and Syring reports net income of $200,000. Pongo uses the equity
method to account for the investment.
Required:
Determine the following:
1. Noncontrolling interest share for 2014.
2. Controlling share of consolidated net income for Pongo Company and subsidiary for 2014.
Answer: Requirement 1
Noncontrolling interest share
($200,000 × 10%) $20,000
Requirement 2
Controlling interest share of consolidated net income:
Income from Pongo’s operations $3,000,000
Income from Syring:
Pongo’s share of Syring income = 90% ×
$200,000 $180,000
Add: Constructive gain on bond
retirement ($2,000,000 + $60,000) × 50% –
980,000 50,000
Less: Piecemeal recognition of gain =
$50,000/5 years (10,000)
220,000
Controlling interest share $3,220,000
Objective: LO2, 4
12) Pachelor Corporation owns 70% of the outstanding stock of Stabb Company. On January 1,
2013, Stabb issued $1,000,000 in 7% bonds that matured on January 1, 2018. At the time of
issuance, the bonds were sold at a discount of $125,000. At January 2, 2015, Pachelor
purchased the bonds for $1,400,000, and constructively retired the debt. Interest is paid annually
on January 1. Straight-line amortization is used by both companies.
Required:
1. Calculate the gain or loss that the consolidated entity incurred to retire the debt.
2. Prepare eliminating/adjusting entries for the consolidating work papers for the year ended
December 31, 2015.
Answer: Requirement 1:
Book value of bonds at time of retirement =
($1,000,000 – $125,000 + [($125,000 / 5 years) × 2]) = $ 925,000
Purchase price of bonds = 1,400,000
Constructive loss on retirement of bonds $ 475,000
Requirement 2:
December 31, 2015:
($1,000,000 × 7%)

Bonds payable 1,000,000
Discount on bonds payable 50,000
(Bond investment: $1,400,000 – $400,000/3)
(Bond discount: $25,000 × 2)

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Interest expense:
[($1,000,000 × 7%) + $125,000/5] = $70,000 + $25,000 = $95,000
Interest income:
($400,000/3) – ($1,000,000 × 7%) = $133,333 – $70,000 = $63,333 (Debit balance)
Objective: LO2, 3
13) Padma Corporation owns 70% of the outstanding stock of Somega Company. On January 1,
2012, Somega issued $2,000,000 in 6% bonds that matured on January 1, 2022. At the time of
issuance, the bonds were sold at a premium of $250,000. At January 1, 2013, Padma purchased
half of the bonds for $910,000, and constructively retired the debt. Annual interest is paid on
December 31. Straight-line amortization is used by both companies.
Required:
Complete the table below with respect to the account balances that Padma, Somega and the
consolidated entity would report on their respective financial statements.
Padma
Somega
Consolidated
Investment in Somega bonds — 12/31/12
Bonds Payable — 12/31/12
Premium on Bonds Payable — 12/31/12
Gain/(loss) on Retirement — 12/31/12
Interest Income — 12/31/12
Interest Expense — 12/31/12

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Answer:
Padma
Somega
Consolidated
-0-
-0-
-0-
920,000
-0-
-0-
930,000
-0-
-0-
-0-
2,000,000
2,000,000
-0-
2,000,000
1,000,000
-0-
2,000,000
1,000,000
-0-
225,000
225,000
-0-
200,000
100,000
-0-
175,000
87,500
-0-
-0-
-0-
-0-
-0-
202,500
-0-
-0-
-0-

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-0-
-0-
-0-
70,000
-0-
-0-
70,000
-0-
-0-
-0-
95,000
95,000
-0-
95,000
47,500
-0-
95,000
47,500
Objective: LO2, 3
14) Patama Holdings owns 70% of Seagull Corporation. On January 1, 2013, Seagull acquires
$1,000,000 of bonds originally issued by Patama on January 1, 2008. The bonds were issued at
a stated rate of 5% for 10 years, for $960,000. Seagull purchased them for $990,000. Assume
that both Patama and Seagull will use the straight-line method for any bond-related amortization.
Annual interest is paid on December 31.
Required:
Complete the table below with respect to the account balances that Patama, Seagull and the
consolidated entity would report on their respective financial statements.
Patama
Seagull
Consolidated
Investment in Patama bonds — 12/31/12
Investment in Patema bonds — 12/31/14
Discount on Bonds Payable — 12/31/12

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Answer:
Patama
Seagull
Consolidated
-0-
-0-
-0-
-0-
992,000
-0-
Investment in Patema bonds — 12/31/14
-0-
994,000
-0-
1,000,000
-0-
1,000,000
1,000,000
-0-
-0-
1,000,000
-0-
-0-
20,000
-0-
20,000
16,000
-0-
-0-

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12,000
-0-
-0-
-0-
-0-
-0-
-0-
-0-
(10,000)
-0-
-0-
-0-
-0-
-0-
-0-
-0-
52,000
-0-
-0-
52,000
-0-
54,000
-0-
54,000
54,000
-0-
-0-
54,000
-0-
-0-
Objective: LO2
15) Parkview Holdings owns 70% of Skyline Corporation. On January 1, 2013, Skyline acquires
half of the $2,000,000 of bonds originally issued by Parkview on January 1, 2008. The bonds
were issued at a stated rate of 5% for 10 years, for $1,920,000. Skyline purchased them for
$950,000. Assume that both Parkview and Skyline will use the straight-line method for any bond-
related amortization. Annual interest is paid on December 31.
Required: Prepare the entries required for the consolidating worksheet for the years ended
December 31, 2008 through December 31, 2018.
Answer: 12/31/08 – 12/31/12: No consolidating worksheet entry required because bonds are
held by a third-party.
12/31/13 Bonds Payable $1,000,000

Investment in Parkview Bonds $960,000

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Gain on Bond constructive retirement 30,000
12/31/14 Bonds Payable $1,000,000

Investment in Skyline Stock 24,000
12/31/15 Bonds Payable $1,000,000

12/31/16 Bonds Payable $1,000,000

12/31/17 Bonds Payable $1,000,000

Investment in Parkview Bonds $1,000,000
Objective: LO2, 3
16) Paleo Corporation holds 80% of the capital stock of Sockrite Company. On January 1, 2013,
Sockrite purchased $50,000 par value, 10% bonds on the open market that had been issued by
Paleo on January 1, 2011. Sockrite paid $58,000 for these bonds which had originally been
issued by Paleo for $53,000, with a 10-year maturity from the date of issue. Interest is paid
annually on December 31. Straight-line amortization is used by both companies.
Required:
1. Calculate the interest income reported by Sockrite related to these bonds in 2013.
2. Calculate the interest expense reported by Paleo related to these bonds in 2013.
3. Calculate the gain or loss on retirement of bonds payable to be reported on consolidated
financial statements in 2013.
Answer: 1. Interest income = ($50,000 × 10%) – ($8,000 / 8) = $4,000
2. Interest expense = ($50,000 × 10%) – ($3,000 / 10) = $4,700
3. Loss= Book value – amount paid = ($53,000 – $600) – $58,000 = $5,600
Objective: LO2
Difficulty: Easy
17) Phlora purchased its 100% ownership in Speshal many years ago at a time when book
values of assets and liabilities equaled market values.
On January 2, 2014, Phlora purchased $200,000 of Speshal Corporation’s 6% bonds for
$182,000. At that time, this was all of the bonds that had been issued by Speshal, and
unamortized premium on Speshal’s books was $3,500. The bonds pay interest on July 1 and
January 1 and mature on January 1, 2019. Both Phlora and Speshal use straight-line
amortization. Phlora uses the equity method of accounting for its investment in Speshal.

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Speshal reported the following for 2014:

Net income $38,000
Dividends $10,000
Required:
Prepare elimination/adjusting entries on the consolidating work papers for the year ended
December 31, 2014.
Answer: Interest payable 6,000
($200,000 × 6% × 1/2)
Bonds payable 200,000

(Premium: $3,500 – $3,500/5)
(Bond investment: $182,000 + $18,000/5)

[Interest income: ($200,000 × 6%) + ($18,000/5)]
[Interest expense: ($200,000 × 6%) – ($3,500/5)]
Income from subsidiary 55,200

Dividends 10,000
Investment in subsidiary 45,200
Income from subsidiary:($38,000 + $21,500 – $21,500/5)
January 2, 2014:
Paid $182,000
Book value $203,500
Gain on retirement $ 21,500
Objective: LO2, 3
18) Sabu is a 65%-owned subsidiary of Peerless. On January 1, 2012, Sabu issued $1,000,000
of $1,000 face amount 8% bonds at $980 per bond. The bonds have interest payments on
December 31 of each year and mature on January 1, 2017. On January 1, 2013, Peerless
purchased all 1,000 bonds on the open market for $1,010 per bond. Straight-line amortization is
used by both companies.
1. Record the journal entries on Sabu’s books made from 2012 to 2017.
2. Record the journal entries on Peerless’ books made from 2012 to 2017.
3. Record the elimination entries for the consolidation working papers for 2012 through 2017.
Answer:
Requirement 1
Date Account Name Debit Credit

Sabu’s Books
1/1/12 Cash 980,000
Bond Discount 20,000
Bonds Payable 1,000,000

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12/31/12 Interest Expense 80,000

Cash 80,000
Bond Discount 4,000
12/31/13 Same as entry for prior year end
1/1/17 Bonds Payable 1,000,000

Cash 1,000,000
Requirement 2
Peerless Books
2012 — No entry
1/1/13 Investment in Bonds 1,010,000

Cash 1,010,000
12/31/13 Cash 80,000
Investment in Bonds 2,500
1/1/17 Cash 1,000,000

Investment in Bonds 1,000,000
Requirement 3
2012 — No entry required — bonds owned by third party
12/31/13 Bonds Payable 1,000,000

Loss on Bond Retirement 26,000
Bond Discount 12,000
12/31/14 Bonds Payable 1,000,000

Investment in Sabu 12,675
Noncontrolling interest 6,825
Bond Discount 8,000

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12/31/15 Bonds Payable 1,000,000

Bond Discount 4,000
12/31/16 Bonds Payable 1,000,000

12/31/17 No entry required

Objective: LO2, 3
19) Pare Corporation owns 65% of the outstanding voting stock of Summer Corporation. On
January 1, 2013, Pare purchased $4,000,000 of bonds that were originally issued by Summer
several years earlier. The ten-year bonds have a 5% interest rate, and pay interest each
December 31.
The bonds were originally issued at a discount of $206,080, but at January 1, 2013, they have a
book value of $3,896,960. Pare paid $4,067,935 for the bonds and will amortize the premium
over the next five years when the bonds mature. Both companies use the straight-method of
amortization.
Required:
1. Calculate the interest expense for 2013 that will be recorded by Summer.
2. Calculate the interest income for 2013 that will be recorded by Pare.
3. Calculate the Gain/Loss on retirement of bonds payable that will be reported on the
consolidated financial statements for the year ending December 31, 2013.
Interest expense = ($4,000,000 × 5%) + ($103,040 / 5) = $220,608
Requirement 2
Interest income = ($4,000,000 × 5%) – ($67,935 / 5) = $186,413
Requirement 3
Loss = Book value – amount paid = $3,896,960 – $4,067,935 = ($170,975)
Objective: LO2, 3
Difficulty: Easy
20) Pass Corporation owns 80% of Sindy Company, purchased at the underlying book value on
January 1, 2013. On January 1, 2013, Pass also purchased $200,000 par value 6% bonds that
had been issued by Sindy on January 1, 2010 with a ten-year maturity(due January 1, 2020).
Annual interest is paid on December 31. Straight-line amortization is used by both companies.
At year-end 2013, the following entry was made on the consolidating worksheet.
Bonds Payable $200,000

Bond Premium 12,000
Loss on Bond Retirement 7,000
Interest Income (a)
Investment in Sindy Bonds $218,000
Interest Expense (b)

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Required:
1. How much did Pass pay for the bonds?
2. What is the book value of the bonds on the date of purchase?
3. What amount of interest income and interest expense must be eliminated in the entry above
designated as (a) and (b)?
Bonds issued 1/1/10 and mature 1/1/20, so at time of purchase, seven years remain. At 12/31/13
(time of entry shown above), six years remain.
Pass shows an investment of $218,000 at 12/31/13. Assuming that the $18,000 premium will be
written off over the six years that remain, the premium amortization is $3,000 per year. Thus at
the beginning of 2013 (the date of purchase), the premium would have been $21,000, indicating
that Pass paid $221,000.
Requirement 2
If the bond premium remaining at 12/31/13 is $12,000, then the premium remaining at the time of
purchase(1/1/13) by Pass was $14,000($12,000 + $2,000 annual amortization). Thus the book
value at the time of purchase was $214,000.
Requirements 3 and 4
Interest income = ($200,000 × 6%) – ($18,000 / 6) = $9,000
Interest expense = ($200,000 × 6%) – ($12,000 / 6) = $10,000
Objective: LO2, 3

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Chapter 7 advanced accounting test bank

Pengantar Akuntansi I (Universitas Katolik Indonesia Atma Jaya)

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Advanced Accounting, 12e (Beams et al.)

7.1 Multiple Choice Questions

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Use the following information to answer the question(s) below.

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Gain on constructive retirement = $ 211,200

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20) Noncontrolling interest share for 2013 was

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Pitta Soujourn Consolidated

Cost of sales $ 280,000 $ 50,000 $ 330,000

Required: Answer the following questions.

2. Effect on consolidated net income:

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$100,000 par × 60% purchased $60,000

Nominal interest ($60,000 × 9%) $ 5,400

6. Pitta’s income from Sojourn

Share of Sojourn’s reported income

12/31/14 Cash 8,000

Investment in bonds 1,000

Interest income 9,000

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Cost of bonds to Paka ($98,500 – $500) $98,000

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Bonds payable 50,000

Premium on bonds payable:

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Answer: 2013 Debit Credit

12/31 Premium on Bonds Payable 9,000

Dec 31 Bond Interest Expense 36,000

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Dec 31 Bond Interest Receivable 36,000

Requirement 3: Consolidated Working Papers

Dec 31 Bonds Payable 900,000

Dec 31 Bond Interest Receivable 16,000

Dec 31 Bond Interest Expense 18,400

Consolidated Working Papers

Dec 31 Bonds Payable 400,000

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Discount on Bonds Payable 4,800

(Book value of bonds $392,800 – purchase cost $412,000 = $19,200 loss)

December 31, 2014:

Interest revenue 15,000

Premium on bonds payable 12,000

December 31, 2014:

Premium on bonds payable 12,000

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Loss on retirement of bonds 3,000

Interest payable 60,000

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Loss on retirement of bonds 316,667

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Loss on retirement of bonds 158,333