Advanced Accounting

by Debra Jeter and Paul Chaney

Chapter 10: Consolidated Financial

Statements - Miscellaneous Topics

Slides Authored by Hannah Wong, Ph.D.

Rutgers University
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 Intercompany Bold Holdings

Bonds acquired by an affiliate are no

longer held by external parties
In the consolidated financial statements:
 the bonds are viewed as being constructively
retired
 record a gain or loss on this early retirement
of debt

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 Allocation of Constructive Gain/Loss

 Entirely to the issuing company

 Entirely to the purchasing company
 Entirely to the parent company
 Allocated
between the purchasing and issuing
companies

Note: the allocation method affects the consolidated

net income each year. However, it does not affect
the total consolidated net income over the life of the issue.

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Computation of Constructive Gain/Loss

Book value

Constructive gain/loss
allocated to issuing company

Par value

Constructive gain/loss
allocated to
purchasing company

Purchase price
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 Accounting for Intercompany Bonds

An Example

12/31/2001 12/31/2003

P acquired S’s
9% bonds Bond
matures
Par value of bonds acquired = $500,000 x 60%
Book value of bonds acquired = $480,000 x 60%
Purchase price = $310,000

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Accounting for Intercompany Bonds

Book value
$288,000

$12,000 Constructive loss

allocated to S Company
Par value
$300,000

$10,000 Constructive loss

allocated to P Company

Purchase price
$310,000
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 Accounting for Intercompany Bonds

Year of Intercompany Bond Purchase - EE’s

Loss on constructive retirement of bonds 10,000
Investment in S Bonds 10,000

(1) To recognize the constructive loss not recorded by P and

(2) adjust the intercompany bonds to par value

Loss on constructive retirement of bonds 12,000

Discount on bonds payable 12,000

(1) To recognize the constructive loss not recorded by S and

(2) adjust the intercompany bonds to par value

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Accounting for Intercompany Bonds

Year of Intercompany Bond Purchase - EE’s

Bonds payable 300,000

Investment in S Bonds 300,000

To eliminate intercompany bond investment and liability

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 Intercompany Bonds
Cost and Partial Equity Methods
Year After Intercompany Bond Purchase - EE’s
Beginning retained earnings- P 10,000
Investment in S Bonds 10,000

(1) To record last year’s constructive loss not recorded by P and

(2) adjust the intercompany bond investment to par value

Beginning retained earnings- P 9,600

Beginning retained earnings- S 2,400
Discount on bonds payable 12,000
(1) To recognize the constructive loss not recorded by S and
(2) adjust the intercompany bonds to par value
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 Intercompany Bonds
Cost and Partial Equity Methods
Year After Intercompany Bond Purchase - EE’s
Investment in S Bonds 2,500
Interest revenue 2,500

To reverse amortization of premium recorded by P in the current year

Discount on bonds payable 3,000

Interest expense 3,000

To reverse amortization of discount recorded by S in the current year

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 Intercompany Bonds
Cost and Partial Equity Methods
Year After Intercompany Bond Purchase - EE’s
Interest revenue 27,000
Interest expense 27,000

To eliminate intercompany bond interest

Bonds payable 300,000

Investment in S Bonds 300,000

To eliminate intercompany bond investment and liability

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 Intercompany Bonds
Complete Equity Method
Year After Intercompany Bond Purchase - EE’s

Investment in S 19,600
Beginning retained earnings- S 2,400
Discount on bonds payable 12,000
Investment in S Bonds 10,000

(1) To record last year’s constructive loss not recorded by

P or S and
(2) adjust the intercompany bond investment to par value

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 Intercompany Bonds
Complete Equity Method
Year After Intercompany Bond Purchase - EE’s
Investment in S Bonds 2,500
Interest revenue 2,500

To reverse amortization of premium recorded by P in the current year

Discount on bonds payable 3,000

Interest expense 3,000

To reverse amortization of discount recorded by S in the current year

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 Intercompany Bonds
Complete Equity Method
Year After Intercompany Bond Purchase - EE’s
Bonds payable 300,000
Investment in S Bonds 300,000

To eliminate intercompany bond investment and liability

Interest revenue 27,000

Interest expense 27,000

To eliminate intercompany bond interest

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 Intercompany Bonds

Consolidated NI-Year after Bond Purchase

Reported income of P
Dividend income Constructive loss recorded by P
in the current year (premium
amortization)

P’s contribution to combined income

Reported NI of S
+ Constructive loss recorded Adjusted NI of S x P%
by S in the current year
(discount amortization)
Consolidated net income

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 Upstream Sales - Equipment
Cost and Partial Equity Methods
Consolidated Retained Earnings

Constructive loss NOT Ending Reported R/E of P

recorded by P

Increase in S R/E x P%
Increase in R/E of S since acquisition
- Constructive loss NOT
recorded by S

Consolidated R/E
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 Notes Receivable Discounted

Issues
$100,000 note Discount
Parent Subsidiary note with
Company bank

If S credits notes receivable upon discounting the note,

no adjustment is needed in consolidation.

If S credits notes receivable discounted upon discounting the

note, an adjustment is needed in consolidation:
Dr Notes receivable discounted
Cr Notes receivable
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 Notes Receivable Discounted

Issues
$100,000 note Discount
Receives note Parent
from third Subsidiary note with
Company bank
party

If P and S credits notes receivable upon discounting the note,

no adjustment is needed in consolidation.

If P or S credits notes receivable discounted upon discounting

the note, an adjustment is needed in consolidation:
Dr Notes receivable discounted
Cr Notes receivable
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 Stock Dividend from Subsidiary
Journal Entries

Subsidiary

Stock dividend declared (or R/E) 150,000

Capital stock 150,000

Parent
Memorandum entry only.

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 Stock Dividend from Subsidiary
Eliminating Entries
Year of stock dividend
Capital stock 150,000
Stock dividend declared (or R/E) 150,000

To reverse the subsidiary’s JE on stock dividend

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 Subsidiary with Preferred Stock

Book value of net assets

Less: allocated to preferred stock
par value
+ call premium
+ dividends in arrears

= residual allocated to common stock

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 Subsidiary with Preferred Stock

Noncontrolling
interest
Preferred stock
Common stock held
held by parent
by parent
Preferred stock
not held
by parent
Common stock
not held
by parent
Controlling
interest
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 Subsidiary with Preferred Stock

Controlling Interest in Net Income

Reported income of P
Dividend income Other adjustments

P’s contribution to combined income

P’s share of S adjusted income

Consolidated net income

Adjusted NI of S assigned to preferred stock x (P’s prefered stock %)

+ Adjusted NI of S assigned to common stock x (P’s common stock %)

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 Advanced Accounting
by
Debra Jeter and Paul Chaney

Copyright © 2001 John Wiley & Sons, Inc. All rights reserved.
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