Advanced Accounting Fischer 11th Edition Test Bank

Advanced Accounting Fischer 11th Edition Test Bank
Advanced Accounting Fischer 11th Edition Test

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Chapter 5--Intercompany Transactions: Bonds and Leases
Student: ___________________________________________________________________________
1. The usual impetus for transactions that create a long-term debtor-creditor relationship between members of a
consolidated group is due to the:
A. subsidiary's ability to borrow larger amounts of capital at more favorable terms than would be available to
the parent.
B. parent's ability to borrow larger amounts of capital at more favorable terms than would be available to the
subsidiary.
C. parent's desire to decentralize asset management and credit control.
D. parent's desire to eliminate long-term debt.
2. The motivation of a parent company to purchase the outstanding bonds of a subsidiary could be to:
A. replace the existing debt with new debt at a lower interest rate.
B. reduce the parent company's acquisition price for the subsidiary.
C. increase the parent company's ownership percentage in the subsidiary.
D. create interest revenue to offset interest expense in future income statements.
3. Intercompany debt that must be eliminated from consolidated financial statements may result from:
A. one member of a consolidated group selling its bonds directly to another member of the group.
B. one member of a consolidated group advancing funds to another member of the group so that the member
may retire bonds it had issued to outside parties.
C. one member of a consolidated group purchasing bonds from outside parties as an investment that had been
issued to outside parities by another member of the group.
D. all of the above.
4. Elimination procedures for intercompany bonds purchased from outside parties by another member of the
consolidated group are:
A. not needed except in the period of acquisition if purchased at par.
B. not needed except in the period of acquisition if purchased at a premium or discount.
C. not needed except in the period of acquisition if only a portion of the outstanding bonds are purchased.
D. needed each period as long as the intercompany investment in bonds exists.
5. In years subsequent to the year one member of a consolidated group purchases another member’s outstanding
bonds from outside parties, Consolidated Income Statements:
A. recognize a prorated share of any gain or loss from intercompany bonds.
B. recognize a prorated share of any gain but would not show a share of a loss from intercompany bonds.
C. recognize a prorated share of any loss but would not show a share of a gain from intercompany bonds.
D. would not recognize any gain or loss from intercompany bonds.
6. A subsidiary has outstanding $100,000 of 8% bonds that were issued at face value. The parent purchased all
the bonds for $96,000 with 5 years remaining to maturity. How will the parent's use of the effective interest
amortization rather than straight-line amortization of the discount affect the consolidated financial statements?
A. The consolidated financial statements report the same information whether the parent uses straight-line or
effective interest amortization on its investment in sub’s bonds.
B. Will result in a different gain on retirement
C. Will result in more interest expense in the first year after the intercompany purchase.
D. Will result in less interest expense in the first year after the intercompany purchase.
7. In the year when one member of a consolidated group purchases from outside parties the bonds of another
affiliate, the consolidated income statement includes:
A. a gain if purchased above book value.
B. a gain if purchased below book value.
C. a loss if purchased below book value.
D. a deferred gain if purchased above book value.
8. On an income distribution schedule, any gain or loss resulting from intercompany bonds is charged to
A. the issuer of the bonds.
B. the purchaser of the bonds.
C. allocation between the issuer and the purchaser.
D. none of the above
9. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 8%, 10-year bonds sold
to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at
a price that reflected the current 9% effective interest rate. How should this event be reflected in the current
year's consolidated statements?
A. The bonds remain in the balance sheet and are accounted for at a 7% effective rate.
B. The bonds remain in the balance sheet and are accounted for at a 9% effective rate.
C. Retirement of the bonds at a gain as of the purchase date.
D. Retirement of the bonds at a loss as of the purchase date.
10. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 6%, 10-year bonds
sold to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding
bonds at a price that reflected the current 9% effective interest rate. How should this event be reflected in the
current year's consolidated statements?
12. Company S is a 100%-owned subsidiary of Company P. On January 1, 20X9, Company S has $200,000 of
8% face rate bonds outstanding, which were issued at face value. The bonds had 5 years to maturity on January
1, 20X9. Premiums or discounts would be amortized on a straight-line basis. On that date, Company P
purchased the bonds for $198,000. The amount on the consolidated balance sheet relative to the debt is:
A. bonds payable $200,000.
B. bonds payable $200,000, discount $2,000.
C. bonds payable $200,000, discount $1,600.
D. The bonds do not appear on the consolidated balance sheet.
8% face rate bonds outstanding. The bonds had 5 years to maturity on January 1, 20X3, and had an unamortized
discount of $5,000. On that date, Company P purchased the bonds for $99,000. The net adjustment needed to
consolidate retained earnings on December 31, 20X3 is ____.
A. $(4,000)
B. $(3,200)
C. $(800)
D. $0
14. Sun Company is a 100%-owned subsidiary of Peter Company. On January 1, 20X1, Sun Company has
$500,000 of 8% face rate bonds outstanding, with an unamortized discount of $5,000 that is being amortized
over a 5 year remaining life to maturity. On that date, Peter Company purchased the bonds for $497,000. The
adjustment to the consolidated income of the two companies needed in the consolidation process for 20X2 (the
following year) is ____.
A. $2,800 increase
B. $400 decrease
C. $400 increase
D. $2,800 decrease
15. Company S is a 100%-owned subsidiary of Company P. Company P purchased, at a premium, Company S

bonds that are outstanding and have a remaining discount. Consolidation theory takes the position that:
A. interest expense should be adjusted to reflect the market value of the bonds on the date of Company P's
purchase.
B. the debt has been retired at a loss.
C. the debt is outstanding but should be shown at face value.
D. the gain or loss on retirement should be allocated over the remaining life of the bonds.
16. Powell Company owns an 80% interest in Sauter, Inc. On January 1, 20X1, Sauter issued $400,000 of
10-year, 12% bonds at a premium of $50,000. On December 31, 20X5, 5 years after original issuance, Powell
purchased all of the outstanding bonds for $390,000. Both firms use the straight-line method of amortization.
What is the gain on retirement on the 20X5 consolidated income statement?

A. $12,500
B. $22,500
C. $10,000
D. $35,000
17. Company P owns 80% of Company S. On January 1, 20X3 Company S has outstanding 6% bonds with a
face value of $200,000 and an unamortized discount of $3,000, which is being amortized on a straight-line basis
over a remaining term of 10 years. On January 1, 20X3, Company P purchased all the bonds for $205,000. The
premium also is amortized on a straight-line basis. The net impact of the purchase on the noncontrolling interest
as of December 31, 20X3, is ____.
A. $(8,000)
B. $(1,600)
C. $(1,440)
D. $(1,200)
18. Company S is a 100%-owned subsidiary of Company P. Company P purchased all the outstanding bonds of
Company S at a discount. The bonds had a remaining issuance premium at the time of Company P's purchase.
The bonds have 5 years to maturity. At the end of 5 years, consolidated retained earnings:
A. is greater as a result of the purchase.
B. is less as a result of the purchase.
C. is not affected by the purchase.
D. cannot be determined from the information provided.
The interest adjustment in the 20X5 subsidiary income distribution schedule is ____.
A. $2,000
B. $5,000
C. $4,500
D. $0
20. When one member of a consolidated group purchases only part of the outstanding bonds of another member
of the group (for example, 80% of the bonds),
A. all bonds, and all the interest expense and interest revenue applicable to the bonds should be eliminated.
B. 20% of the bonds, and 20% the interest expense and interest revenue applicable to the bonds should be
eliminated.
C. 80% of the bonds, and 80% the interest expense and interest revenue applicable to the bonds should be
eliminated.
D. none of the bonds, and none of the interest expense and interest revenue applicable to the bonds should be
eliminated.
21. Soap Company issued $200,000 of 8%, 5-year bonds on January 1, 20X6. The discount on issuance was
$12,000. Bond interest is paid annually on December 31. On December 31, 20X8, Pumice Company purchased
one-half of the outstanding bonds for $96,000. Both companies use the straight-line method of amortization.
How much bond interest expense will appear on the December 31, 20X8, consolidated income statement?
A. $18,400
B. $16,000
C. $9,200
D. $8,000
How much interest expense will appear on the December 31, 20X9, consolidated income statement?
A. $18,400
B. $16,000
C. $9,200
D. $8,000
What amount of gain or loss from retirement of debt will be reported on the 20X8 consolidated financial
statements?
A. $1,600 gain
B. $1,600 loss
C. $1,200 gain
D. $1,200 loss
24. The purchase of outstanding subsidiary bonds by the parent company has the same impact on consolidated
statements as:
A. the subsidiary retiring its own debt with the proceeds of new debt issued to outside parties.
B. the subsidiary retiring the debt with the proceeds of a loan from the parent.
C. the subsidiary retiring the debt with the proceeds of a new stock issue.
D. allowing the bonds to continue to be held by outside interests.
25. Leasing subsidiaries are formed to achieve centralized asset management through leasing to affiliated firms,
and when they are consolidated with the parent, they are consolidated
A. only if the parent controls at least 20% of the leasing subsidiary.
B. only if the parent controls at least 50% of the leasing subsidiary.
C. only if the parent controls at least 90% of the leasing subsidiary.
D. regardless of the ownership percentage of the parent.
26. The effect of an operating lease on the income distribution schedule:

A. is non-existent.
B. affects only the lessee's income.
C. affects only the lessor's income.
D. affects the amount of income or distribution of income between the noncontrolling and controlling interests.
27. Lease terms can be considered to be "significantly affected":
A. when the terms are the same for affiliated firms as for independent firms.
B. when the terms could not reasonably be expected to occur between independent firms.
C. only if the lease is an operating lease to the lessee and lessor.
D. only if the lease is a direct-financing lease to the lessee and lessor.
28. The parent company leased a machine to its subsidiary using a direct-financing lease that included a bargain
purchase option. As a result of the intercompany lease, the following items should be eliminated in the
consolidation process:
Depreciation
Machine Debt Interest Expense
A. Yes Yes Yes Yes
B. Yes Yes Yes No
C. Yes No No No
D. No Yes Yes No
29. Park owns an 80% interest in the common stock of Stable Company. Park leased a machine to Stable under
a 5-year, direct financing lease with a bargain purchase option. The lease term began January 1, 20X4. The
impact of the lease on the Noncontrolling share of income for 20X4:
A. is an increase.
B. is a decrease.
C. is zero.
D. cannot be determined from the information given.
30. Phil Company leased a machine to its 100%-owned subsidiary, Scout Company. The direct financing lease
required annual lease payments in advance of $2,319 for 5 years. The present value of the minimum lease
payments at 8% interest is $10,000. The adjustment needed to arrive at consolidated net income for the first
year after the lease is ____.
A. $0
B. $800
C. $2,319
D. $10,000
payments at 8% interest is $10,000. The adjustment of assets and liabilities needed to prepare a consolidated
balance sheet is to eliminate the:
A. asset leased.
B. asset leased and the obligation under the capital lease.
C. obligation under the capital lease and the present value of the minimum lease payments.
D. obligation under the capital lease.
32. Under a sales-type lease between affiliated companies, how does the lessor treat the intercompany profit at
the inception of the lease?
A. It is recognized at the inception of the lease.
B. It is deferred and amortized over the lessee’s period of usage.
C. It is deferred and recognized at the end of the lease term.
D. There is no profit at the inception of the lease.
33. Consolidation procedures for sales-type leases:

A. allow for the recognition of the profit or loss from the lease by the lessee at the inception of the lease.
B. allow for the recognition of the profit or loss from the lease by the lessor at the inception of the lease.
C. defer the profit or loss and then amortize it over the lessee's period of usage.
D. defer the profit or loss and then amortize it over the lessor's period of usage.
34. Which of the following statements is true?

A. No adjustments are made in the income distribution schedule as a result of operating, direct-financing, and
sales-type leases.
B. No adjustments are made in the income distribution schedule as a result of operating and direct-financing
leases.
C. No adjustments are made in the income distribution schedule as a result of operating and sales-type leases.
D. No adjustments are made in the income distribution schedule as a result of direct-financing and sales-type
leases.

A. No elimination entries are required on a worksheet as a result of operating, direct-financing, and sales-type
leases.
B. No elimination entries are required on a worksheet as a result of direct-financing and sales-type leases.
C. No elimination entries are required on a worksheet as a result of operating leases.
D. All the preceding are false.
36. When there is an unguaranteed residual value for the lessor in a direct-financing lease, this means:
A. the total payments to be received by the lessor will come from the lessee.
B. the total payments to be received by the lessee will come from the lessor.
C. a portion of the total payments to be received by the lessor will come from parties outside the consolidated
group.
D. a portion of the total payments to be received by the lessee will come from parties outside the consolidated
group.
37. What is recorded by the lessee and the lessor when an intercompany lease contains an unguaranteed residual
value?
Lessee Lessor
A. Present value of minimum lease Present value of minimum lease payments
payments and the unguaranteed residual value
B. Minimum lease payments payable Minimum lease payments receivable and
the unguaranteed residual value
C. Minimum lease payments payable Present value of minimum lease payments
D. Present value of minimum lease Minimum lease payments receivable and
payments the unguaranteed residual value
38. On January 1, 20X3, Pope Company acquired 100% of the common stock of Siegel Company for $300,000.
On this date Siegel had total owners' equity of $250,000. Any excess of cost over book value is attributable to
goodwill. Pope accounts for its investment in Siegel using the simple equity method.
On July 1, 20X3, Siegel Company sold to outside investors $300,000 par value of 10-year, 10% bonds. The
price received was equal to par. The bonds pay interest semi-annually on July 1 and January 1.
During early 20X4, market interest rates on bonds similar to those issued by Siegel decreased to 8%. As a
result, the market value of the bonds increased. On July 1, 20X4, Pope purchased $150,000 par value of Siegel's
bonds, paying $163,000. Pope still holds the bonds on December 31, 20X4 and has amortized the premium,
using the straight-line method.
Required:
Complete the Figure 5-1 worksheet for consolidated financial statements for the year ended December 31,
20X4. Round all computations to the nearest dollar.
Figure 5-1
Trial Balance Eliminations and
Pope Siegel Adjustment
s
Account Titles Company Company Debit Credit
Interest Receivable 7,500
Other Current Assets 157,212 371,000
Investment in Sub. Company 410,000
Investment in Sub. Bonds 162,278
Land 50,000 30,000

Buildings and Equipment 350,000 380,000
Rent Receivable (100,000) (50,000)
Goodwill
Interest Payable (15,000)

Other Current Liabilities (120,000) (56,000)
Bonds Payable, 10% (300,000)
Other Long-Term Liabilities (200,000)

Common Stock – P Co. (200,000)
Other Paid-in Capital – P Co. (100,000)
Retained Earnings – P Co. (280,212)
Common Stock – S Co. (50,000)

Other Paid-in Capital – S Co. (70,000)
Retained Earnings – S Co. (180,000)
Net Sales (500,000) (400,000)

Cost of Goods Sold 300,000 240,000
Operating Expenses 100,000 50,000
Interest Expense 30,000
Interest Income (6,778)
Subsidiary Income (80,000)
Dividends Declared – P Co. 50,000
Dividends Declared – S Co. 20,000
Loss on Retirement of Bonds
Consolidated Net Income

To NCI
To Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0 0
(continued)
Consol. Control. Consol.

Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Interest Receivable
Other Current Assets
Investment in Sub. Company
Investment in Sub. Bonds
Land
Buildings and Equipment
Rent Receivable
Goodwill
Interest Payable
Other Current Liabilities
Bonds Payable, 10%
Other Long-Term Liabilities

Common Stock – P Co.
Other Paid-in Capital – P Co.
Retained Earnings – P Co.
Common Stock – S Co.

Other Paid-in Capital – S Co.
Retained Earnings – S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Interest Expense
Interest Income
Subsidiary Income
Dividends Declared – P Co.
Dividends Declared – S Co.

To NCI
Total NCI
Also on July 1, 20X3, Siegel Company sold to outside investors $200,000 par value of 10-year, 10% bonds. The
using the effective-interest method which has resulted in interest income of $4,508 and a balance in the
Investment in Subsidiary Bonds account of $112,203.
Required:
Prepare the eliminating entries pertaining to the intercompany purchase of the bonds for the year ended
December 31, 20X4.
goodwill. Pope accounts for its Investment in Siegel using the simple equity method.
On January 1, 20X3, Siegel Company sold to outside investors $300,000 par value of 10-year, 10% bonds. The
During 20X3, market interest rates on bonds similar to those issued by Siegel decreased to 8%. As a result, the
market value of the bonds increased. On December 31, 20X3, Pope purchased $150,000 par value of Siegel's
Required:
Prepare the eliminating entries pertaining to the intercompany purchase of bonds outstanding for the year ended
December 31, 20X4.
41. On January 1, 20X4, Parent Company purchased 90% of the common stock of Subsidiary Company for
$450,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $20,000,
$130,000, and $200,000, respectively. Any excess of cost over book value is due to goodwill. Parent accounts
for the Investment in Subsidiary using the cost method.
On January 1, 20X4, Subsidiary sold $100,000 par value of 6%, ten-year bonds for $97,000. The bonds pay
interest semi-annually on January 1 and July 1 of each year.
On January 1, 20X5, Parent repurchased all of Subsidiary's bonds for $96,400. The bonds are still held on
December 31, 20X5.
Both companies have correctly recorded all entries relative to bonds and interest, using straight-line
amortization for premium or discount.
Required:
Complete the Figure 5-4 worksheet for consolidated financial statements for the year ended of December 31,
Figure 5-4
Parent Sub. Adjustment
s
Land 100,000 50,000

Goodwill

Discount on Bonds Payable 2,400

Net Sales (630,000) (360,000)

Dividend Income (27,000)
Gain on Retirement of Bonds

To NCI
Total NCI
0 0
(continued)

Interest Receivable
Land
Rent Receivable
Goodwill
Interest Payable
Bonds Payable, 6%
Discount on Bonds Payable

Net Sales
Cost of Goods Sold
Operating Expenses
Interest Expense
Interest Income
Dividend Income

To NCI
Total NCI
for the Investment in Subsidiary using the simple equity method.
December 31, 20X5.
Required:
Prepare the eliminating entries pertaining to the intercompany purchase of bonds for the year ended December
31, 20X5.
$130,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent account for
the Investment in Subsidiary using the simple equity method.
On July 1, 20X4, Subsidiary sold $100,000 par value of 9%, ten-year bonds for $106,755, which resulted in an
effective interest rate of 8%. The bonds pay interest semi-annually on January 1 and July 1 of each year.
Subsidiary uses the effective-interest method of amortizing the premium.
An amortization table for 20X4 and 20X5 is presented below:
Date Cash Int Interest Exp Premium Amort Premium Bal Carrying Value
7/1/X4 6,755 106,755
12/31/X4 4,500 4,270 230 6,525 106,525
7/1/X5 4,500 4,261 239 6,286 106,286
12/31/X5 4,500 4,251 249 6,037 106,037
On July 1, 20X5, Parent repurchased all of Par's bonds for $94,153, which resulted in an effective interest rate of 10%. The bonds are still held at
year end.
Both companies have correctly recorded all entries relative to bonds and interest. The balance in the Investment in Subsidiary Bonds account is
$94,361 at December 31, 20X5, and the parent recognized interest income of $4,708 during the period.
Required:
Prepare the eliminating entries pertaining to the intercompany purchase of bonds for the year ending December 31, 20X5.
$402,000. On this date Subsidiary had total owners' equity of $440,000. Any excess of cost over book value is
due to goodwill. Parent accounts for its investment in Subsidiary using the simple equity method.
On January 1, 20X3, Parent held merchandise acquired from Subsidiary for $50,000. During 20X3, Subsidiary
sold merchandise to Parent for $120,000, of which Parent holds $30,000 on December 31, 20X3. Subsidiary's
gross profit on sales is 40%. On December 31, 20X3, Parent still owes Subsidiary $5,000 for merchandise.
On December 31, 20X1, Parent sold $100,000 par value of 11%, 10-year bonds for $106,232, which resulted in
an effective interest rate of 10%. The bonds pay interest semi-annually on June 30 and December 31. Parent
uses the effective-interest method of amortization for the premium.
Cash Interest Expense Premium Premium Balance Debt Carrying Value

Interest Amortization
12/31/X1 6,232 106,232
6/30/X2 5,500 5,312 (188) 6,044 106,044
12/31/X2 5,500 5,302 (198) 5,846 105,846
6/30/X3 5,500 5,292 (208) 5,638 105,638
12/31/X3 5,500 5,282 (218) 5,420 105,420
On December 31, 20X2, Subsidiary repurchased $50,000 par value of the bonds, paying a price equal to par. The bonds are still held on December
31, 20X3.
On December 31, 20X3, Parent sold equipment with a cost of $50,000 and accumulated depreciation of $30,000 to Subsidiary for $40,000.
Subsidiary will use the equipment beginning in 20X4.
Required:
Complete the Figure 5-7 worksheet for consolidated financial statements for the year ended December 31, 20X3. Round all computations to the
nearest dollar.
Figure 5-7
s
Inventory, December 31 120,000 60,000
Investment in Parent Bonds 50,000

Land 140,000 100,000
Accumulated Depreciation (120,000) (130,000)
Goodwill
Current Liabilities (160,000) (80,000)

Premium on Bonds Payable (5,420)
Other Long-Term Liabilities (200,000) (140,000)

Net Sales (590,000) (520,000)


Gain on Sale of Equipment (20,000)

To NCI
Total NCI
0 0
(continued)
Inventory, December 31
Investment in Parent Bonds

Land
Accumulated Depreciation
Goodwill
Current Liabilities
Bonds Payable, 10%
Premium on Bonds Payable

Net Sales
Cost of Goods Sold
Operating Expenses
Interest Income
Interest Expense
Subsidiary Income
Gain on Sale of Equipment

To NCI
Total NCI
45. Smart Corporation is a 90%-owned subsidiary of Phan Inc. On January 2, 20X1, Smart agreed to lease
$400,000 of construction equipment from Phan for $3,000 a month on an operating lease. The equipment has a
10-year life and is being depreciated using the straight-line method.
Required:
Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-8 partial
worksheet for December 31, 20X3. Key and explain all eliminations and adjustments.
Figure 5-8
Phan Inc. and Smart Corp.
Consolidated Partial Worksheet
For the Year Ended December 31, 20X3
Elimination
s and
Trial Balance Adjustments
Phan Smart Debit Credit
Debit
Equipment 987,000 40,000
Accumulated Depreciation - Equipment (212,500) (8,000)
Equipment Under Operating Lease 400,000
Accumulated Depreciation - Equipment (120,000)
Under Operating Lease
Rent Receivable 3,000
Rent Payable (3,000)
Rental Income (50,000)
Rent Expense 36,000
Depreciation Expense 138,700 2,000
46. Tempo Industries is an 80%-owned subsidiary of Dalie Inc. On January 1, 20X2, Dalie leased an asset to
Tempo and the following journal entries were made:
Tempo
Assets Under Capital Lease 21,561

Cash 5,000
Obligations Under Capital Lease 16,561
Dalie
Minimum Lease Payments Receivable 20,000

Cash 5,000
Unearned Interest Income 3,439
Asset (cost of asset leased) 18,000
Sales Profit on Leases 3,561
The terms of the lease agreement require Tempo to make five payments of $5,000 each at the beginning of each year. The implicit interest rate used
by both Dalie and Tempo is 8%.
Required:
Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-9 partial worksheet of December 31, 20X2. Key and
explain all eliminations and adjustments.
Figure 5-9
Dalie and Tempo Industries
Elimination
s and
Account Titles Dalie Tempo Debit Credit
Unearned Interest Income (2,114)
Accumulated Depreciation - Assets Under (4,312)
Capital Lease
Plant Assets 410,000 260,000
Accumulated Depreciation - Plant Assets (167,000) (98,000)
Obligations Under Capital lease (16,561)
Sales Profit on Leases (3,561)
47. On January 1, 20X1 Parent Company acquired 90% of the common stock of Subsidiary Company for
$100,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent accounts
On January 1, 20X2, Parent purchased equipment for $204,110 and immediately leased the equipment to
Subsidiary on a 4-year lease. The minimum lease payments of $60,000 are to be made annually on January 1,
beginning immediately, for a total of 4 payments. The implicit interest rate is 12%. The lease provides for an
automatic transfer of title at the end of 4 years. The estimated useful life of the equipment is 6 years. The lease
has been capitalized by both companies. The lease amortization schedule is presented below:
Interest on
previous balance Gross Receivable Unearned
Date Payment Interest Carrying Value
1/1/X2 240,000 (35,890) 204,110
1/1/X2 60,000 180,000 (35,890) 144,110
1/1/X3 60,000 17,293 120,000 (18,597) 101,403
1/1/X4 60,000 12,168 60,000 (6,429) 53,571
1/1/X5 60,000 6,429 0 0 0
Required:
Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-10 partial worksheet as of December 31, 20X2. Key and
Figure 5-10
s
Min. Lease Payments Rec. 180,000
Equipment under Cap. Lease 204,110
Acc. Depr. - Eq. Cap. Lease (34,018)
Obligation under Cap. Lease (144,110)
Interest Payable on Lease (17,293)
Interest Income on Lease (17,293)
Interest Expense on Lease 17,293
(continued)

Min. Lease Payments Rec.
Unearned Interest Income
Acc. Depr. - Bldg & Equip
Equipment under Cap. Lease
Acc. Depr. - Eq. Cap. Lease
Obligation under Cap. Lease
Interest Payable on Lease
Interest Income on Lease
Interest Expense on Lease
48. On January 1, 20X1, Parent Company acquired 90% of the common stock of Subsidiary Company for
$100,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent uses the
simple equity method to account for its investment in subsidiary.
has been capitalized by both companies. A lease amortization schedule, applicable to either company, is
presented below:
Interest on previous
balance Gross Receivable Unearned Interest
Date Payment Carrying Value
1/1/X2 240,000 (35,890) 204,110
1/1/X2 60,000 180,000 (35,890) 144,110
1/1/X3 60,000 17,293 120,000 (18,597) 101,403
1/1/X4 60,000 12,168 60,000 (6,429) 53,571
1/1/X5 60,000 6,429 0 0 0
Required:
Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-11 partial worksheet as of December 31, 20X3. Key
and explain all eliminations and adjustments.
Figure 5-11
s
(continued)
has been capitalized by both companies.
A lease amortization schedule, applicable to either company, is presented below:
Carrying Carrying Interest Principal

Value on Value Rate Interest Payment Reduction
1-1-X2 $204,120
- 60,000
1-1-X2 144,120 12% $17,294 $60,000 $42,706
- 42,706
1-1-X3 101,414 12% 12,170 60,000 47,830
- 47,830
1-1-X4 53,584 12% 6,416* 60,000 53,584
- 53,584
1-1-X5 $ 0 *Adjusted for
rounding error.
On January 1, 20X3, Parent held merchandise acquired from Subsidiary for $10,000. During 20X3, subsidiary sold merchandise to Parent for
$50,000, of which $15,000 is held by Parent on December 31, 20X3. Subsidiary's usual gross profit on affiliated sales is 40%.
Required:
nearest dollar.
Figure 5-12
s
Current Assets 234,196 280,504

Land 100,000 60,000

Goodwill


Net Sales (600,000) (350,000)

Operating & Other Expenses 140,000 67,830


To NCI
Total NCI
0 0
(continued)
Current Assets

Land
Goodwill
Current Liabilities

Net Sales
Cost of Goods Sold
Operating & Other Expenses

Subsidiary Income

To NCI
Total NCI
Subsidiary on a 4-year lease. The transaction was legally structured as a sales-type lease with a present value for
the minimum lease payments of $204,120. Parent recorded the following entry:

Equipment 174,120
Sales Profit on Lease 30,000
The minimum lease payments of $60,000 are to be made annually on January 1, beginning immediately, for a total of 4 payments. The implicit
interest rate is 12%. The lease provides for an automatic transfer of title at the end of 4 years. The estimated useful life of the equipment is 6 years.
The lease has been capitalized by both companies.

1-1-X2 $204,120
- 60,000
1-1-X2 144,120 12% $17,294 $60,000 $42,706
- 42,706
1-1-X3 101,414 12% 12,170 60,000 47,830
- 47,830
1-1-X4 53,584 12% 6,416* 60,000 53,584
- 53,584
rounding error.
Required:
Figure 5-13
s
Sales Profit on Lease (30,000)
(continued)
Sales Profit on Lease
51. The Planes Company owns 100% of the outstanding common stock of the Sands Company. Sands issued
$100,000 of face value, 9%, 10-year bonds on January 1, 20X3, for $96,000. The discount is being amortized
on a straight-line basis. On January 1, 20X8, Planes purchased all the bonds as an investment for $95,000.
Required:
Be specific in answering the following questions and include numerical explanations.
a. How will this bond issue be recorded and accounted for in 20X8 on the separate books of Planes and Sands?
b. How will this bond issue be accounted for on the 20X8 consolidated statements?
c. How will this bond issue be recorded and accounted for in 20X9 on the separate books of Planes and Sands?
d. How will this bond issue be accounted for on the 20X9 consolidated statements?
52. The Park Company owns 80% of the outstanding common stock of the Sea Company. Park is about to lease
a machine with a 5-year life to the Sea Company. The lease would begin January 1, 20X3.
Required:
Explain the adjustments that will be required in the consolidation process if each of the following occurs.
a. The lease is an operating lease.
b. The lease is a direct financing lease with a bargain purchase option.
c. The lease is a sales-type lease with a bargain purchase option.

Chapter 5--Intercompany Transactions: Bonds and Leases Key
1. The usual impetus for transactions that create a long-term debtor-creditor relationship between members of a
consolidated group is due to the:
A. subsidiary's ability to borrow larger amounts of capital at more favorable terms than would be available to
the parent.
B. parent's ability to borrow larger amounts of capital at more favorable terms than would be available to the
subsidiary.
C. parent's desire to decentralize asset management and credit control.
D. parent's desire to eliminate long-term debt.
2. The motivation of a parent company to purchase the outstanding bonds of a subsidiary could be to:
A. replace the existing debt with new debt at a lower interest rate.
B. reduce the parent company's acquisition price for the subsidiary.
C. increase the parent company's ownership percentage in the subsidiary.
D. create interest revenue to offset interest expense in future income statements.
3. Intercompany debt that must be eliminated from consolidated financial statements may result from:
A. one member of a consolidated group selling its bonds directly to another member of the group.
B. one member of a consolidated group advancing funds to another member of the group so that the member
may retire bonds it had issued to outside parties.
C. one member of a consolidated group purchasing bonds from outside parties as an investment that had been
issued to outside parities by another member of the group.
D. all of the above.
4. Elimination procedures for intercompany bonds purchased from outside parties by another member of the
consolidated group are:
A. not needed except in the period of acquisition if purchased at par.
B. not needed except in the period of acquisition if purchased at a premium or discount.
C. not needed except in the period of acquisition if only a portion of the outstanding bonds are purchased.
D. needed each period as long as the intercompany investment in bonds exists.
5. In years subsequent to the year one member of a consolidated group purchases another member’s outstanding
bonds from outside parties, Consolidated Income Statements:
A. recognize a prorated share of any gain or loss from intercompany bonds.
B. recognize a prorated share of any gain but would not show a share of a loss from intercompany bonds.
C. recognize a prorated share of any loss but would not show a share of a gain from intercompany bonds.
D. would not recognize any gain or loss from intercompany bonds.
6. A subsidiary has outstanding $100,000 of 8% bonds that were issued at face value. The parent purchased all
the bonds for $96,000 with 5 years remaining to maturity. How will the parent's use of the effective interest
amortization rather than straight-line amortization of the discount affect the consolidated financial statements?
A. The consolidated financial statements report the same information whether the parent uses straight-line or
effective interest amortization on its investment in sub’s bonds.
B. Will result in a different gain on retirement
C. Will result in more interest expense in the first year after the intercompany purchase.
D. Will result in less interest expense in the first year after the intercompany purchase.
7. In the year when one member of a consolidated group purchases from outside parties the bonds of another
affiliate, the consolidated income statement includes:
A. a gain if purchased above book value.
B. a gain if purchased below book value.
C. a loss if purchased below book value.
D. a deferred gain if purchased above book value.
8. On an income distribution schedule, any gain or loss resulting from intercompany bonds is charged to
A. the issuer of the bonds.
B. the purchaser of the bonds.
C. allocation between the issuer and the purchaser.
D. none of the above
9. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 8%, 10-year bonds sold
to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at
a price that reflected the current 9% effective interest rate. How should this event be reflected in the current
year's consolidated statements?
8% face rate bonds outstanding, which were issued at face value. The bonds had 5 years to maturity on January
1, 20X9. Premiums or discounts would be amortized on a straight-line basis. On that date, Company P
purchased the bonds for $198,000. The amount on the consolidated balance sheet relative to the debt is:
A. bonds payable $200,000.
B. bonds payable $200,000, discount $2,000.
C. bonds payable $200,000, discount $1,600.
D. The bonds do not appear on the consolidated balance sheet.
8% face rate bonds outstanding. The bonds had 5 years to maturity on January 1, 20X3, and had an unamortized
discount of $5,000. On that date, Company P purchased the bonds for $99,000. The net adjustment needed to
consolidate retained earnings on December 31, 20X3 is ____.
A. $(4,000)
B. $(3,200)
C. $(800)
D. $0
14. Sun Company is a 100%-owned subsidiary of Peter Company. On January 1, 20X1, Sun Company has
$500,000 of 8% face rate bonds outstanding, with an unamortized discount of $5,000 that is being amortized
over a 5 year remaining life to maturity. On that date, Peter Company purchased the bonds for $497,000. The
adjustment to the consolidated income of the two companies needed in the consolidation process for 20X2 (the
following year) is ____.
A. $2,800 increase
B. $400 decrease
C. $400 increase
D. $2,800 decrease
15. Company S is a 100%-owned subsidiary of Company P. Company P purchased, at a premium, Company S

bonds that are outstanding and have a remaining discount. Consolidation theory takes the position that:
A. interest expense should be adjusted to reflect the market value of the bonds on the date of Company P's
purchase.
B. the debt has been retired at a loss.
C. the debt is outstanding but should be shown at face value.
D. the gain or loss on retirement should be allocated over the remaining life of the bonds.
What is the gain on retirement on the 20X5 consolidated income statement?

A. $12,500
B. $22,500
C. $10,000
D. $35,000
17. Company P owns 80% of Company S. On January 1, 20X3 Company S has outstanding 6% bonds with a
face value of $200,000 and an unamortized discount of $3,000, which is being amortized on a straight-line basis
over a remaining term of 10 years. On January 1, 20X3, Company P purchased all the bonds for $205,000. The
premium also is amortized on a straight-line basis. The net impact of the purchase on the noncontrolling interest
as of December 31, 20X3, is ____.
A. $(8,000)
B. $(1,600)
C. $(1,440)
D. $(1,200)
18. Company S is a 100%-owned subsidiary of Company P. Company P purchased all the outstanding bonds of
Company S at a discount. The bonds had a remaining issuance premium at the time of Company P's purchase.
The bonds have 5 years to maturity. At the end of 5 years, consolidated retained earnings:
A. is greater as a result of the purchase.
B. is less as a result of the purchase.
C. is not affected by the purchase.
D. cannot be determined from the information provided.
The interest adjustment in the 20X5 subsidiary income distribution schedule is ____.
A. $2,000
B. $5,000
C. $4,500
D. $0
20. When one member of a consolidated group purchases only part of the outstanding bonds of another member
of the group (for example, 80% of the bonds),
A. all bonds, and all the interest expense and interest revenue applicable to the bonds should be eliminated.
B. 20% of the bonds, and 20% the interest expense and interest revenue applicable to the bonds should be
eliminated.
C. 80% of the bonds, and 80% the interest expense and interest revenue applicable to the bonds should be
eliminated.
D. none of the bonds, and none of the interest expense and interest revenue applicable to the bonds should be
eliminated.
How much bond interest expense will appear on the December 31, 20X8, consolidated income statement?
A. $18,400
B. $16,000
C. $9,200
D. $8,000
How much interest expense will appear on the December 31, 20X9, consolidated income statement?
A. $18,400
B. $16,000
C. $9,200
D. $8,000
What amount of gain or loss from retirement of debt will be reported on the 20X8 consolidated financial
statements?
A. $1,600 gain
B. $1,600 loss
C. $1,200 gain
D. $1,200 loss
24. The purchase of outstanding subsidiary bonds by the parent company has the same impact on consolidated
statements as:
A. the subsidiary retiring its own debt with the proceeds of new debt issued to outside parties.
B. the subsidiary retiring the debt with the proceeds of a loan from the parent.
C. the subsidiary retiring the debt with the proceeds of a new stock issue.
D. allowing the bonds to continue to be held by outside interests.
25. Leasing subsidiaries are formed to achieve centralized asset management through leasing to affiliated firms,
and when they are consolidated with the parent, they are consolidated
A. only if the parent controls at least 20% of the leasing subsidiary.
B. only if the parent controls at least 50% of the leasing subsidiary.
C. only if the parent controls at least 90% of the leasing subsidiary.
D. regardless of the ownership percentage of the parent.
26. The effect of an operating lease on the income distribution schedule:

A. is non-existent.
B. affects only the lessee's income.
C. affects only the lessor's income.
D. affects the amount of income or distribution of income between the noncontrolling and controlling interests.
27. Lease terms can be considered to be "significantly affected":
A. when the terms are the same for affiliated firms as for independent firms.
B. when the terms could not reasonably be expected to occur between independent firms.
C. only if the lease is an operating lease to the lessee and lessor.
D. only if the lease is a direct-financing lease to the lessee and lessor.
28. The parent company leased a machine to its subsidiary using a direct-financing lease that included a bargain
purchase option. As a result of the intercompany lease, the following items should be eliminated in the
consolidation process:
Depreciation
Machine Debt Interest Expense
A. Yes Yes Yes Yes
B. Yes Yes Yes No
C. Yes No No No
D. No Yes Yes No
29. Park owns an 80% interest in the common stock of Stable Company. Park leased a machine to Stable under
a 5-year, direct financing lease with a bargain purchase option. The lease term began January 1, 20X4. The
impact of the lease on the Noncontrolling share of income for 20X4:
A. is an increase.
B. is a decrease.
C. is zero.
D. cannot be determined from the information given.
payments at 8% interest is $10,000. The adjustment needed to arrive at consolidated net income for the first
year after the lease is ____.
A. $0
B. $800
C. $2,319
D. $10,000
payments at 8% interest is $10,000. The adjustment of assets and liabilities needed to prepare a consolidated
balance sheet is to eliminate the:
A. asset leased.
B. asset leased and the obligation under the capital lease.
C. obligation under the capital lease and the present value of the minimum lease payments.
D. obligation under the capital lease.
32. Under a sales-type lease between affiliated companies, how does the lessor treat the intercompany profit at
the inception of the lease?
A. It is recognized at the inception of the lease.
B. It is deferred and amortized over the lessee’s period of usage.
C. It is deferred and recognized at the end of the lease term.
D. There is no profit at the inception of the lease.
33. Consolidation procedures for sales-type leases:

A. allow for the recognition of the profit or loss from the lease by the lessee at the inception of the lease.
B. allow for the recognition of the profit or loss from the lease by the lessor at the inception of the lease.
C. defer the profit or loss and then amortize it over the lessee's period of usage.
D. defer the profit or loss and then amortize it over the lessor's period of usage.

A. No adjustments are made in the income distribution schedule as a result of operating, direct-financing, and
sales-type leases.
B. No adjustments are made in the income distribution schedule as a result of operating and direct-financing
leases.
C. No adjustments are made in the income distribution schedule as a result of operating and sales-type leases.
D. No adjustments are made in the income distribution schedule as a result of direct-financing and sales-type
leases.

A. No elimination entries are required on a worksheet as a result of operating, direct-financing, and sales-type
leases.
B. No elimination entries are required on a worksheet as a result of direct-financing and sales-type leases.
C. No elimination entries are required on a worksheet as a result of operating leases.
D. All the preceding are false.
36. When there is an unguaranteed residual value for the lessor in a direct-financing lease, this means:
A. the total payments to be received by the lessor will come from the lessee.
B. the total payments to be received by the lessee will come from the lessor.
C. a portion of the total payments to be received by the lessor will come from parties outside the consolidated
group.
D. a portion of the total payments to be received by the lessee will come from parties outside the consolidated
group.
37. What is recorded by the lessee and the lessor when an intercompany lease contains an unguaranteed residual
value?
Lessee Lessor
A. Present value of minimum lease Present value of minimum lease payments
payments and the unguaranteed residual value
B. Minimum lease payments payable Minimum lease payments receivable and
the unguaranteed residual value
C. Minimum lease payments payable Present value of minimum lease payments
D. Present value of minimum lease Minimum lease payments receivable and
payments the unguaranteed residual value
On July 1, 20X3, Siegel Company sold to outside investors $300,000 par value of 10-year, 10% bonds. The
Required:
Complete the Figure 5-1 worksheet for consolidated financial statements for the year ended December 31,
Figure 5-1
s
Land 50,000 30,000

Goodwill



Net Sales (500,000) (400,000)


To NCI
Total NCI
0 0
(continued)

Interest Receivable
Land
Rent Receivable
Goodwill
Interest Payable
Bonds Payable, 10%


Net Sales
Cost of Goods Sold
Operating Expenses
Interest Expense
Interest Income
Subsidiary Income

To NCI
Total NCI
For the worksheet solution, please refer to Answer 5-1.
Answer 5-1
s
Interest Receivable 7,500 (B1) 7,500
Investment in Sub. Company 410,000 (CY) 60,000
(EL) 300,000
(D) 50,000
Investment in Sub. Bonds 162,278 (B2) 162,278
Land 50,000 30,000

Accumulated depreciation (100,000) (50,000)
Goodwill (D) 50,000
Interest Payable (15,000) (B1) 7,500

Bonds Payable, 10% (300,000) (B2) 150,000

Common Stock – S Co. (50,000) (EL) 50,000

Other Paid-in Capital – S Co. (70,000) (EL) 70,000
Retained Earnings – S Co. (180,000) (EL) 180,000
Net Sales (500,000) (400,000)

Interest Expense 30,000 (B2) 7,500
Interest Income (6,778) (B2) 6,778
Subsidiary Income (80,000) (CY) 80,000
Dividends declared – P Co. 50,000
Dividends declared – S Co. 20,000 (CY) 20,000
Loss on Retirement of Bonds (B2) 13,000

To NCI
Total NCI
0 0 607,278 607,278
(continued)
Interest Receivable 0
Other Current Assets 528,212
Investment in Sub. Company 0
Investment in Sub. Bonds 0
Land 80,000
Buildings and Equipment 730,000
Accumulated depreciation (150,000)
Goodwill 50,000

Other Current Liabilities (176,000)


Net Sales (900,000)

Cost of Goods Sold 540,000
Operating Expenses 150,000
Interest Income 0
Subsidiary Income 0
Dividends declared – P Co. 50,000
Dividends declared – S Co.
Loss on Retirement of Bonds 13,000
Consolidated Net Income (174,500)

To NCI 0
To Controlling Interest 174,500 (174,500)
Total NCI 0
Ret. Earn. Contr. Int. 12-31 (404,712) (404,712)
0
Eliminations and Adjustments:
(CY) Eliminate the current-year entries made in the investment account and in the Siegel income account.
(EL) Eliminate the Siegel Company equity balances at the beginning of the year against the investment account.
(D) Distribute the $50,000 excess of cost over book value to goodwill. ($300,000 - $250,000)
(B1) Eliminate $7,500 of intercompany interest receivable and payable. ($150,000 x 10% / 2)
(B2) Eliminate all of the intercompany interest income and one-half of the interest expense for the last one-half of the year. Eliminate the
balance in investment in bonds against one-half of the bonds payable. The resulting loss of $13,000 is the same as the loss on July 1,
20X4 ($163,000 purchase price of bonds less $150,000 carrying value).
Also on July 1, 20X3, Siegel Company sold to outside investors $200,000 par value of 10-year, 10% bonds. The
using the effective-interest method which has resulted in interest income of $4,508 and a balance in the
Investment in Subsidiary Bonds account of $112,203.
Required:
Prepare the eliminating entries pertaining to the intercompany purchase of the bonds for the year ended
December 31, 20X4.
(B1) Interest payable 5,000

Interest receivable 5,000
Eliminate $5,000 ($100,000 x 10% / 2) of intercompany interest
receivable and payable. (payment date January 1)
(B2) Interest income - Parent 4,508

Interest expense - Subsidiary 5,000
Eliminate all of the intercompany interest income and one-half of
the interest expense for the last one-half of the year.
Bonds payable - Subsidiary 100,000

Investment in Subsidiary bonds 112,203
Eliminate the balance in investment in bonds against one-half of
the bonds payable.
Loss on retirement of bonds 12,695

The resulting loss is $12,695 ($112,695 purchase price of bonds
less $100,000 carrying value).
goodwill. Pope accounts for its Investment in Siegel using the simple equity method.
On January 1, 20X3, Siegel Company sold to outside investors $300,000 par value of 10-year, 10% bonds. The
During 20X3, market interest rates on bonds similar to those issued by Siegel decreased to 8%. As a result, the
market value of the bonds increased. On December 31, 20X3, Pope purchased $150,000 par value of Siegel's
Required:
Prepare the eliminating entries pertaining to the intercompany purchase of bonds outstanding for the year ended
December 31, 20X4.
(B1) Interest payable 7,500

Eliminate $7,500 ($150,000 x 10% / 2) of intercompany interest
receivable and payable. (payment date January 1)

Eliminate all of the intercompany interest income ($15,000 -
1,444*) and one-half of the interest expense for the last one-half
of the year.

Eliminate the balance in investment in bonds ($163,000 -
$1,444*) against one-half of the bonds payable.
Retained earnings 13,000

The resulting loss is $13,000 ($163,000 purchase price of bonds
less $150,000 carrying value). Since the loss occurred in 20X3, it
is debited to retained earnings.
*Annual adjustment to interest = $1,444 ($13,000 / 9).

for the Investment in Subsidiary using the cost method.
December 31, 20X5.
Required:
Complete the Figure 5-4 worksheet for consolidated financial statements for the year ended of December 31,
Figure 5-4
s
Land 100,000 50,000

Goodwill

Discount on Bonds Payable 2,400

Net Sales (630,000) (360,000)

Dividend Income (27,000)

To NCI
Total NCI
0 0
(continued)

Interest Receivable
Land
Rent Receivable
Goodwill
Interest Payable
Bonds Payable, 6%
Discount on Bonds Payable

Net Sales
Cost of Goods Sold
Operating Expenses
Interest Expense
Interest Income
Dividend Income

To NCI
Total NCI
Answer 5-4
s
Interest Receivable 3,000 (B1) 3,000
Investment in Sub. Company 450,000 (CV) 45,000 (EL) 360,000
(D) 135,000
Investment in Sub. Bonds 96,800 (B2) 96,800
Land 100,000 50,000

Goodwill (D) 150,000
Interest Payable (3,000) (B1) 3,000

Bonds Payable, 6% (100,000) (B2) 100,000
Discount on Bonds Payable 2,400 (B2) 2,400
Retained Earnings – P Co. (400,000) (CV) 45,000

Retained Earnings – S Co. (250,000) (EL) 225,000 (D) 15,000
Net Sales (630,000) (360,000)

Interest Expense 6,300 (B2) 6,300
Interest Income (6,400) (B2) 6,400
Dividend Income (27,000) (CY) 27,000
Dividends Declared – S Co. 30,000 (CY) 27,000
Gain on Retirement of Bonds (B2) 900

To NCI
Total NCI
0 0 691,400 691,400
(continued)
Interest Receivable 0
Investment in Sub. Bonds 0
Land 150,000
Accumulated Depreciation (220,000)
Goodwill 150,000
Interest Payable 0
Other Current Liabilities (184,000)
Bonds Payable, 6% 0
Discount on Bonds Payable 0

Net Sales (990,000)

Interest Expense 0
Interest Income 0
Dividend Income 0
Gain on Retirement of Bonds (900)

To NCI 7,070 (7,070)
Total NCI (59,070) (59,070)
Ret. Earn. Contr. Int. 12-31 581,830 (581,830)
0
Determination and Distribution of Excess Schedule:

Company Fair Parent Price (90%) NCI Value
Value (10%)
Fair value of subsidiary $500,000 $450,000 $ 50,000
Less book value of interest acquired:
Common stock 20,000
Paid-in capital in excess of par 130,000
Retained earnings 200,000
350,000 350,000 350,000
Interest acquired 90% 10%
Book value 315,000 35,000
Excess of fair value over book value $150,000 $135,000 $ 15,000
All assigned to goodwill $150,000

(CV) Convert to simple equity method as of January 1, 20X5 (90% of $50,000 increase in Sub’s retained earnings from January 1, 20X4 to
January 1, 20X5).
(CY) Eliminate Parent’s dividend income against dividends declared by Subsidiary.
(EL) Eliminate 90% of the Subsidiary Company equity balances at the beginning of the year against the investment account.
(D) Distribute the $150,000 excess of cost over book value to goodwill; allocate to Parent and NCI.
(B1) Eliminate $3,000 of intercompany interest receivable and payable. ($100,000 x 6% x 1/2)
(B2) Eliminate all of the intercompany interest income and expense. Eliminate the balances in investment in bonds, bonds payable, and
discount on bonds payable. The resulting gain of $900 is the gain as of beginning of year: on January 1, 20X5 $97,300* carrying
value of bonds less $96,400 purchase price.
*Bond purchase amount was $97,000 + $300 amortization of discount ($3,000 / 10).
Subsidiary Company Income Distribution

Schedule
Interest adjustment 100 Internally generated net income 69,900
Gain on retirement 900
Adjusted income 70,700
NCI Share 10%
NCI 7,070
Parent Company Income Distribution Schedule

Internally generated net income 123,200
90% ´ Sub's adjusted income 63,630
Controlling interest 186,830
December 31, 20X5.
Required:
Prepare the eliminating entries pertaining to the intercompany purchase of bonds for the year ended December
31, 20X5.
(B1) Interest payable (1) 3,000

Eliminate intercompany interest receivable and payable. (payment
date January 1)
(B2) Interest income - Parent (2) 6,400

Interest expense - Subsidiary (3) 6,300
Eliminate all of the intercompany interest income and expense for
the year.

Discount on bonds payable (4) 2,400
Investment in Subsidiary bonds (5) 96,800
the bonds payable.
Gain on retirement of bonds (6) 900

The resulting gain is $900 ($97,300 carrying value of bonds less
$96,400 purchase price).
(1) $100,000 x 6% x 1/2 = $3,000

(2) Discount on parent purchase $100,000 - $96,400 = 3,600 / 9 = $400 amortization of discount. Interest income = $6,400 (6,000 + 400)
(3) Original bond discount = $3,000 ($100,000 - 97,000); amortization of discount is $300 per year ($3,000 / 10). Interest expense = $6,300 (6,000 +
300)
(4) $3,000 - ($300 x 2 years) = 2,400
(5) $96,400 + 400 = 96,800
(6) Gain is $900 ($97,000 + 300) carrying value of bonds less $96,400 purchase price
$130,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent account for
the Investment in Subsidiary using the simple equity method.
On July 1, 20X4, Subsidiary sold $100,000 par value of 9%, ten-year bonds for $106,755, which resulted in an
effective interest rate of 8%. The bonds pay interest semi-annually on January 1 and July 1 of each year.
Subsidiary uses the effective-interest method of amortizing the premium.
Date Cash Int Interest Exp Premium Amort Premium Bal Carrying Value
7/1/X4 6,755 106,755
12/31/X4 4,500 4,270 230 6,525 106,525
7/1/X5 4,500 4,261 239 6,286 106,286
12/31/X5 4,500 4,251 249 6,037 106,037
On July 1, 20X5, Parent repurchased all of Par's bonds for $94,153, which resulted in an effective interest rate of 10%. The bonds are still held at
year end.
Both companies have correctly recorded all entries relative to bonds and interest. The balance in the Investment in Subsidiary Bonds account is
$94,361 at December 31, 20X5, and the parent recognized interest income of $4,708 during the period.
Required:
Prepare the eliminating entries pertaining to the intercompany purchase of bonds for the year ending December 31, 20X5.
(B1) Interest payable (1) 4,500

Eliminate intercompany interest receivable and payable. (payment
date January 1)

Eliminate all of the intercompany interest income and expense for
the year.

Premium on bond payable 6,037
the bonds payable.
Gain on retirement of bonds (2) 12,133

To recognize the gain on the retirement of the bonds
(1) $100,000 x 9% x 1/2 = $4,500

(2) $106,286 carrying value of bonds less $94,153 purchase price
$402,000. On this date Subsidiary had total owners' equity of $440,000. Any excess of cost over book value is
due to goodwill. Parent accounts for its investment in Subsidiary using the simple equity method.
On January 1, 20X3, Parent held merchandise acquired from Subsidiary for $50,000. During 20X3, Subsidiary
sold merchandise to Parent for $120,000, of which Parent holds $30,000 on December 31, 20X3. Subsidiary's
gross profit on sales is 40%. On December 31, 20X3, Parent still owes Subsidiary $5,000 for merchandise.
On December 31, 20X1, Parent sold $100,000 par value of 11%, 10-year bonds for $106,232, which resulted in
an effective interest rate of 10%. The bonds pay interest semi-annually on June 30 and December 31. Parent
uses the effective-interest method of amortization for the premium.
Cash Interest Expense Premium Premium Balance Debt Carrying Value

Interest Amortization
12/31/X1 6,232 106,232
6/30/X2 5,500 5,312 (188) 6,044 106,044
12/31/X2 5,500 5,302 (198) 5,846 105,846
6/30/X3 5,500 5,292 (208) 5,638 105,638
12/31/X3 5,500 5,282 (218) 5,420 105,420
On December 31, 20X2, Subsidiary repurchased $50,000 par value of the bonds, paying a price equal to par. The bonds are still held on December
31, 20X3.
On December 31, 20X3, Parent sold equipment with a cost of $50,000 and accumulated depreciation of $30,000 to Subsidiary for $40,000.
Subsidiary will use the equipment beginning in 20X4.
Required:
nearest dollar.
Figure 5-7
s
Inventory, December 31 120,000 60,000
Investment in Parent Bonds 50,000

Land 140,000 100,000
Goodwill


Net Sales (590,000) (520,000)


Gain on Sale of Equipment (20,000)

To NCI
Total NCI
0 0
(continued)
Inventory, December 31
Investment in Parent Bonds

Land
Goodwill
Current Liabilities
Bonds Payable, 10%
Premium on Bonds Payable

Net Sales
Cost of Goods Sold
Operating Expenses
Interest Income
Interest Expense
Subsidiary Income
Gain on Sale of Equipment

To NCI
Total NCI
Answer 5-7
s
Inventory, December 31 120,000 60,000 (EI) 12,000
Other Current Assets 399,620 325,000 (IA) 5,000
(EL) 440,000
(D) 50,000
Investment in Parent Bonds 50,000 (B) 50,000
Land 140,000 100,000
Buildings and Equipment 325,000 440,000 (F) 10,000
Accumulated Depreciation (120,000) (130,000) (F) 30,000
Goodwill (D) 62,500
Current Liabilities (160,000) (80,000) (IA) 5,000

Bonds Payable, 10% (100,000) (B) 50,000
Premium on Bonds Payable (5,420) (B) 2,710
Retained Earnings – P Co. (489,200) (BI) 16,000 (B) 2,923

Retained Earnings – S Co. (250,000) (EL) 200,000 (D) 12,500
(BI) 4,000
Net Sales (590,000) (520,000) (IS) 120,000

Cost of Goods Sold 355,000 310,000 (EI) 12,000 (BI) 20,000
(IS) 120,000
Interest Income (5,500) (B) 5,500
Interest Expense 10,574 (B) 5,287
Gain on Sale of Equipment (20,000) (F) 20,000

To NCI
Total NCI
0 0 827,710 827,710
(continued)
Inventory, December 31 168,000
Investment in Parent Bonds 0

Land 240,000
Goodwill 62,500
Current Liabilities (235,000)


Net Sales (990,000)


Interest Income 0
Subsidiary Income 0
Gain on Sale of Equipment 0

To NCI 21,600 (21,600)
Total NCI (135,100) (135,100)
0
Determination and Distribution of Excess Schedule:

Company Fair Parent Price (80%) NCI Value
Value (20%)
Fair value of subsidiary $502,500 $402,000 $ 100,500
Less book value of interest acquired:
Total owners’ equity 440,000 440,000 440,000
Interest acquired 80% 20%
Book value 352,000 88,000
Excess of fair value over book value $ 62,500 $ 50,000 $ 12,500
All assigned to goodwill $ 62,500

(CY) Eliminate the current-year entries made in the investment account and in the subsidiary income account; eliminate intercompany
dividends.
(EL) Eliminate 80% of the Subsidiary Company equity balances at the beginning of the year against the investment account.
(D) Distribute the $62,500 excess of cost over book value to goodwill; allocate to Parent and Noncontrolling Interest.
(BI) Eliminate the $20,000 ($50,000 x 40%) of gross profit in the beginning inventory.
(IS) Eliminate the entire intercompany sales of $120,000.
(EI) Eliminate the $12,000 ($30,000 x 40%) of gross profit in the ending inventory.
(IA) Eliminate the $5,000 intercompany accounts receivable and payable.
(B) Eliminate the interest income and the investment in bonds. Eliminate one-half of the bonds payable, premium on bonds, and interest
expense. The gain to Parent of $2,923 is credited to retained earnings since it occurred in 20X2.
(F) Eliminate the gain on sale of equipment ($40,000 - $20,000 Net book value), restore the old accumulated depreciation of $30,000,
and increase the equipment by $10,000 to restore its original historical cost of $50,000.
Subsidiary Company Income Distribution

Schedule
Deferred profit in ending inventory 12,000 Internally generated net income 100,000
Realized profit in beginning inventory 20,000
Adjusted income 108,000
NCI Share 20%
NCI 21,600
Parent Company Income Distribution Schedule

Defer gain on sale 20,000 Internally generated net income 130,000
Amortize gain on debt retirement 213
80% ´ Sub's adjusted income 86,400
Controlling interest 196,187
45. Smart Corporation is a 90%-owned subsidiary of Phan Inc. On January 2, 20X1, Smart agreed to lease
$400,000 of construction equipment from Phan for $3,000 a month on an operating lease. The equipment has a
10-year life and is being depreciated using the straight-line method.
Required:
Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-8 partial
worksheet for December 31, 20X3. Key and explain all eliminations and adjustments.
Figure 5-8
Elimination
s and
Debit
Equipment 987,000 40,000
Accumulated Depreciation - Equipment (212,500) (8,000)
Equipment Under Operating Lease 400,000
Accumulated Depreciation - Equipment (120,000)
Rent Receivable 3,000
Rent Payable (3,000)
Rental Income (50,000)
Rent Expense 36,000
Answer 5-8
Eliminations
and
Debit
Equipment 987,000 40,000 (OL2) 400,000
Accumulated Depreciation - Equipment (212,500) (8,000) (OL2) 120,000
Equipment Under Operating Lease 400,000 (OL2) 400,000
Accumulated Depreciation - Equipment (120,000) (OL2) 120,000
Rent Receivable 3,000 (OL1b) 3,000
Rent Payable (3,000) (OL1b) 3,000
Rental Income (50,000) (OL1a) 36,000
Rent Expense 36,000 (OL1a) 36,000
559,000 559,000
(OL1a) Eliminate intercompany rent expense/revenue of $3,000 per month.
(OL1b) Eliminate one month's accrued rent receivable and payable.
(OL2) Reclassify asset under the intercompany operating lease and related accumulated depreciation.
46. Tempo Industries is an 80%-owned subsidiary of Dalie Inc. On January 1, 20X2, Dalie leased an asset to
Tempo and the following journal entries were made:
Tempo

Cash 5,000
Obligations Under Capital Lease 16,561
Dalie

Cash 5,000
Asset (cost of asset leased) 18,000
Sales Profit on Leases 3,561
The terms of the lease agreement require Tempo to make five payments of $5,000 each at the beginning of each year. The implicit interest rate used
by both Dalie and Tempo is 8%.
Required:
Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-9 partial worksheet of December 31, 20X2. Key and
Figure 5-9
Elimination
s and
Accumulated Depreciation - Assets Under (4,312)
Capital Lease
Plant Assets 410,000 260,000
Accumulated Depreciation - Plant Assets (167,000) (98,000)
Obligations Under Capital lease (16,561)
Sales Profit on Leases (3,561)
Answer 5-9
Elimination
s and
Minimum Lease Payments Receivable 20,000 (CL2) 20,000
Unearned Interest Income (2,114) (CL2) 2,114
Assets Under Capital Lease 21,561 (CL2) 21,561
Accumulated Depreciation - Assets Under (4,312) (CL3) 4,312
Capital Lease
Plant Assets 410,000 260,000 (CL2) 21,561 (CL4) 3,561
Accumulated Depreciation - Plant Assets (167,000) (98,000) (CL5) 712 (CL3) 4,312
Obligations Under Capital lease (16,561) (CL2) 16,561
Interest Payable (1,325) (CL2) 1,325
Interest Income (1,325) (CL1) 1,325
Sales Profit on Leases (3,561) (CL4) 3,561
Interest Expense 1,325 (CL1) 1,325
Depreciation Expense 17,500 10,470 (CL5) 712
51,471 51,471
(CL1) Eliminate intercompany interest expense/revenue.
(CL2) Eliminate intercompany debt and unearned income; eliminate the asset under capital lease and record the owned asset.
(CL3) Reclassify depreciation.
(CL4) Reduce cost of asset for gain on sales-type lease.
(CL5) Reduce depreciation 3,561  5 712 per year, to recognize one year's profit.
47. On January 1, 20X1 Parent Company acquired 90% of the common stock of Subsidiary Company for
has been capitalized by both companies. The lease amortization schedule is presented below:
Interest on
previous balance Gross Receivable Unearned
Date Payment Interest Carrying Value
1/1/X2 240,000 (35,890) 204,110
1/1/X2 60,000 180,000 (35,890) 144,110
1/1/X3 60,000 17,293 120,000 (18,597) 101,403
1/1/X4 60,000 12,168 60,000 (6,429) 53,571
1/1/X5 60,000 6,429 0 0 0
Required:
Figure 5-10
s
(continued)

Acc. Depr. - Bldg & Equip
For the partial worksheet solution, please refer to Answer 5-10.
Answer 5-10
s
Min. Lease Payments Rec. 180,000 (CL2) 180,000
Buildings and Equipment 350,000 300,000 (CL3) 204,110
Accumulated Depreciation (100,000) (50,000) (CL4) 34,018
Equipment under Cap. Lease 204,110 (CL3) 204,110
Acc. Depr. - Eq. Cap. Lease (34,018) (CL4) 34,018
Obligation under Cap. Lease (144,110) (CL2) 144,110
Interest Payable on Lease (17,293) (CL2) 17,293
Interest Income on Lease (17,293) (CL1) 17,293
Interest Expense on Lease 17,293 (CL1) 17,293
(continued)

Min. Lease Payments Rec. 0
Unearned Interest Income 0
Equipment under Cap. Lease 0
Acc. Depr. - Eq. Cap. Lease 0
Obligation under Cap. Lease 0
Interest Payable on Lease 0
Interest Income on Lease 0
Interest Expense on Lease 0
(CL1) Eliminate the intercompany interest income and expense on the lease obligation (per table).
(CL2) Eliminate the intercompany receivable and payable on the leased asset. The receivable balance is $161,403 ($180,000 minimum
lease payment receivable less unearned interest of $18,597). The payable is also $161,403 ($144,110 lease obligation payable plus
$17,293 interest payable).
(CL3) Reclassify the leased equipment as Building and Equipment.
(CL4) Reclassify the accumulated depreciation on the leased equipment.
Note that consolidated net income is not impacted because equal amounts of interest expense and revenue were eliminated.
has been capitalized by both companies. A lease amortization schedule, applicable to either company, is
presented below:
Interest on previous
balance Gross Receivable Unearned Interest
Date Payment Carrying Value
1/1/X2 240,000 (35,890) 204,110
1/1/X2 60,000 180,000 (35,890) 144,110
1/1/X3 60,000 17,293 120,000 (18,597) 101,403
1/1/X4 60,000 12,168 60,000 (6,429) 53,571
1/1/X5 60,000 6,429 0 0 0
Required:
Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-11 partial worksheet as of December 31, 20X3. Key
and explain all eliminations and adjustments.
Figure 5-11
s
(continued)

For the partial worksheet solution, please refer to Answer 5-11.
Answer 5-11
s
(continued)

lease payment receivable less unearned interest of $6,429).
The payable is also $113,571 ($101,403 lease obligation payable plus $12,168 interest payable).
(CL3) Reclassify the leased equipment as ordinary Building and Equipment.
Note that consolidated net income is not impacted because equal amounts of interest expense and revenue were eliminated.
has been capitalized by both companies.

1-1-X2 $204,120
- 60,000
1-1-X2 144,120 12% $17,294 $60,000 $42,706
- 42,706
1-1-X3 101,414 12% 12,170 60,000 47,830
- 47,830
1-1-X4 53,584 12% 6,416* 60,000 53,584
- 53,584
rounding error.
On January 1, 20X3, Parent held merchandise acquired from Subsidiary for $10,000. During 20X3, subsidiary sold merchandise to Parent for
$50,000, of which $15,000 is held by Parent on December 31, 20X3. Subsidiary's usual gross profit on affiliated sales is 40%.
Required:
nearest dollar.
Figure 5-12
s
Current Assets 234,196 280,504

Land 100,000 60,000

Goodwill


Net Sales (600,000) (350,000)



To NCI
Total NCI
0 0
(continued)
Current Assets

Land
Goodwill
Current Liabilities

Net Sales
Cost of Goods Sold

Subsidiary Income

To NCI
Total NCI
Answer 5-12
s
Current Assets 234,196 280,504 (EI) 6,000

(EL) 460,000
(D) 40,000
Land 100,000 60,000

Goodwill (D) 40,000

(BI) 4,000
Retained Earnings – S Co. (310,000) (EL) 310,000
Net Sales (600,000) (350,000) (IS) 50,000

Cost of Goods Sold 372,170 200,000 (EI) 6,000 (BI) 4,000
(IS) 50,000

To NCI
Total NCI
0 0 1,034,330 1,034,330
(continued)
Current Assets 508,700

Land 160,000
Goodwill 40,000
Current Liabilities (183,000)


Net Sales (900,000)

Operating & Other Expenses 207,830

Subsidiary Income 0

To NCI 0
Total NCI 0
0
(CY) Eliminate Parent’s current-year simple equity method entries.
(EL) Eliminate the Subsidiary Company equity balances at the beginning of the year against the investment account.
(D) Distribute the $40,000 ($390,000 - ($50,000 + $100,000 + $200,000)) excess of cost over book value to goodwill.
(BI) Eliminate the $4,000 ($10,000 x 40%) of gross profit in the beginning inventory.
(IS) Eliminate the entire intercompany sales of $50,000.
(EI) Eliminate the $6,000($15,000 x 40%) of gross profit in the ending inventory.
Subsidiary on a 4-year lease. The transaction was legally structured as a sales-type lease with a present value for
the minimum lease payments of $204,120. Parent recorded the following entry:

Equipment 174,120
Sales Profit on Lease 30,000
The minimum lease payments of $60,000 are to be made annually on January 1, beginning immediately, for a total of 4 payments. The implicit
interest rate is 12%. The lease provides for an automatic transfer of title at the end of 4 years. The estimated useful life of the equipment is 6 years.
The lease has been capitalized by both companies.

1-1-X2 $204,120
- 60,000
1-1-X2 144,120 12% $17,294 $60,000 $42,706
- 42,706
1-1-X3 101,414 12% 12,170 60,000 47,830
- 47,830
1-1-X4 53,584 12% 6,416* 60,000 53,584
- 53,584
rounding error.
Required:
Figure 5-13
s
Sales Profit on Lease (30,000)
(continued)

Sales Profit on Lease
For the parital worksheet solution, please refer to Answer 5-13.
Answer 5-13
s
Buildings and Equipment 350,000 300,000 (CL3) 204,120 (CL5) 30,000
Accumulated Depreciation (100,000) (50,000) (CL6) 5,000 (CL4) 34,020
Operating & Other Expenses 120,000 42,706 (CL6) 5,000
Sales Profit on Lease (30,000) (CL5) 30,000
(continued)

Operating & Other Expenses 157,706
Sales Profit on Lease 0
(CL5) Eliminate the Sales Profit on Lease and adjust the leased asset back to cost.
(CL6) Adjust depreciation on the leased asset. ($30,000 / 6 years) The credit to depreciation expense treats part of the sales-type lease
profit as realized to the Parent through use by Subsidiary.
51. The Planes Company owns 100% of the outstanding common stock of the Sands Company. Sands issued
$100,000 of face value, 9%, 10-year bonds on January 1, 20X3, for $96,000. The discount is being amortized
on a straight-line basis. On January 1, 20X8, Planes purchased all the bonds as an investment for $95,000.
Required:
Be specific in answering the following questions and include numerical explanations.
a. How will this bond issue be recorded and accounted for in 20X8 on the separate books of Planes and Sands?
b. How will this bond issue be accounted for on the 20X8 consolidated statements?
c. How will this bond issue be recorded and accounted for in 20X9 on the separate books of Planes and Sands?
d. How will this bond issue be accounted for on the 20X9 consolidated statements?
a. Planes will show the bonds as an investment and will amortize the purchase discount at the rate of $1,000 per year. Planes will record
interest income of $10,000 ($9,000 cash $1,000 discount amortization). Sands will continue to treat the bonds as outstanding and will
record interest expense of $9,400 ($9,000 cash $400 discount amortization).
b. The bonds are considered as retired on January 1, 20X8, at a gain of $3,000 ($98,000 book value less $95,000 price). No interest expense
or revenue should appear in the consolidated statements.
c. In 20X9, Planes will continue to show the bonds as an investment and will record $10,000 interest revenue. Sands will continue to treat the
bonds as outstanding and will record $9,400 interest expense.
d. The consolidated statements will not include the bonds as an investment or as a liability. No interest expense or revenue will be applicable
to these bonds.
52. The Park Company owns 80% of the outstanding common stock of the Sea Company. Park is about to lease
a machine with a 5-year life to the Sea Company. The lease would begin January 1, 20X3.
Required:
Explain the adjustments that will be required in the consolidation process if each of the following occurs.
a. The lease is an operating lease.
b. The lease is a direct financing lease with a bargain purchase option.
c. The lease is a sales-type lease with a bargain purchase option.

Advanced Accounting Fischer 11th Edition Test Bank
a. The intercompany rent expense and rent revenue are eliminated. The asset and related accumulation should be reclassified as normal
productive assets.
b. The intercompany interest expense and revenue recorded on the lease obligation are eliminated. The liability obligation under capital lease
is eliminated against the asset, present value of minimum lease payments. The asset--machine under capital lease should be reclassified as
a normal productive asset.
c. In addition to the procedures outlined in part b, the sales profit is eliminated and the asset is reduced to its cost to the consolidated group.
Depreciation expense is reduced to that applicable to the cost of the asset to the consolidated group.
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15. Company S is a 100%-owned subsidiary of Company P. Company P purchased, at a premium, Company S

What is the gain on retirement on the 20X5 consolidated income statement?

26. The effect of an operating lease on the income distribution schedule:

33. Consolidation procedures for sales-type leases:

34. Which of the following statements is true?

35. Which of the following statements is true?

Investment in Sub. Bonds 162,278

Land 50,000 30,000

Interest Payable (15,000)

Other Long-Term Liabilities (200,000)

Common Stock – S Co. (50,000)

Net Sales (500,000) (400,000)

Consolidated Net Income

Consol. Control. Consol.

Investment in Sub. Bonds

Other Long-Term Liabilities

Common Stock – S Co.

Consolidated Net Income

Investment in Sub. Bonds 96,800

Land 100,000 50,000

Interest Payable (3,000)

Common Stock – S Co. (20,000)

Net Sales (630,000) (360,000)

Consolidated Net Income

Consol. Control. Consol.

Investment in Sub. Bonds

Common Stock – S Co.

Consolidated Net Income

An amortization table for 20X4 and 20X5 is presented below:

An amortization table for 20X2 and 20X3 is presented below:

Cash Interest Expense Premium Premium Balance Debt Carrying Value

Investment in Parent Bonds 50,000

Current Liabilities (160,000) (80,000)

Common Stock – S Co. (100,000)

Net Sales (590,000) (520,000)

Operating Expenses 114,426 115,500

Consolidated Net Income

Investment in Parent Bonds

Common Stock – S Co.

Consolidated Net Income

Assets Under Capital Lease 21,561

Minimum Lease Payments Receivable 20,000

Consol. Control. Consol.

A lease amortization schedule, applicable to either company, is presented below:

Carrying Carrying Interest Principal

Min. Lease Payments Rec. 120,000

Land 100,000 60,000

Current Liabilities (135,000) (48,000)

Common Stock – S Co. (50,000)

Net Sales (600,000) (350,000)

Operating & Other Expenses 140,000 67,830

Consolidated Net Income

Min. Lease Payments Rec.

Common Stock – S Co.