Chapter 9 Intercompany Bond Holdings and Miscellaneous Topics-Consolidated Financial Statements

9
Intercompany
Bond Holdings and
Miscellaneous Topics—
Consolidated Financial
Statements
Advanced Accounting, Fifth Edition
Slide
9-1
Accounting for Intercompany Bonds Illustrated
Illustration: P Company acquired an 80% interest in S Company

for $1,200,000 on January 2, 2009, when the retained earnings
and common stock accounts of S Company were $500,000 and
$1,000,000, respectively. On December 31, 2012, P Company
acquired $300,000 of S Company’s par value bonds (60% of S
Company’s bonds) on the open market for $310,000 after the
semiannual interest payment had been made. At the time of
purchase there were $500,000 par value bonds outstanding with a
book value of $480,000. The bonds mature in four years on
December 31, 2016, and carry an interest rate of 9%. Interest is
paid semiannually on June 30 and December 31. Both companies
use the straight-line method to amortize bond discounts and
premiums. The fiscal year-end of both companies is December 31.
Slide
9-2
LO 2 Allocating the constructive gain or loss.
Book Entry Related to Bond Investment
Prepare the entry made by P Company to record the bond
investment on December 31, 2012:
Dec. 31 Investment in S Company Bonds 310,000

Cash 310,000
Note:
 The usual practice of recording a bond investment does not
separate the discount or premium.
 Since the bonds were purchased on the open market, there is
no entry made on the issuing company’s books.
Slide
9-3
Book Entry Related to Bond Investment
Compute the Constructive Gain or Loss
S Company P Company
Book Value Par Value Purchase Price
288,000 > 300,000 < 310,000
Total Bonds 500,000
BV Bonds 480,000
BV = 96%
BV from 300,00 = - $12,000 - $10,000
288,000
Constructive loss Constructive loss
On the books of the The constructive loss

individual companies, - $22,000 is recognized in the
the constructive loss determination of
is not recorded. Net constructive loss consolidated income.
Slide
9-4
Consolidated Statements Workpaper—2012 Cost Method
P S Eliminations Consolidated
Income Statement Company Company Debit Credit NCI Balances
Sales 3,104,000 2,200,000 5,304,000
Dividend income 16,000 16,000 (5) -
Total revenue 3,120,000 2,200,000 5,304,000
Cost of goods sold 1,700,000 1,360,000 3,060,000
Interest expense 50,000 50,000
Other expenses 1,124,000 665,000 1,789,000
Loss on constructive 10,000 (2)
retirement of bonds 12,000 (3) 22,000
Total cost and expense 2,824,000 2,075,000 4,921,000
Net income 296,000 125,000 383,000
Noncontrolling interest 22,600 (22,600)
Net income 296,000 125,000 38,000 - 22,600 360,400
Retained Earnings Statement
Retained earnings, 1/1 1,650,000 700,000 700,000 (6) 160,000 (1) 1,810,000
Net income 296,000 125,000 38,000 - 22,600 360,400
Dividends declared (150,000) (20,000) 16,000 (5) (4,000) (150,000)
Retained earnings, 12/31 1,796,000 805,000 738,000 176,000 18,600 2,020,400
Balance Sheet
Investment in S Co. bonds 310,000 10,000 (2) -
300,000 (4)
Investment in S. Co. stock 1,200,000 160,000 (1) 1,360,000 (6) -
Other assets 5,420,000 2,620,000 8,040,000
Total assets 6,930,000 2,620,000 8,040,000
9% bonds payable 500,000 300,000 (4) 200,000
Discount on bonds payable (20,000) 12,000 (8,000)
Other liabilities 2,134,000 335,000 2,469,000
Capital stock 3,000,000 1,000,000 1,000,000 (6) 3,000,000
Retained earnings 1,796,000 805,000 738,000 176,000 18,600 2,020,400
NCI in net assets 1/1 340,000 (6) 340,000 -
NCI in net assets 12/31 358,600 358,600
Slide Total liab. & equity 6,930,000 2,620,000 2,198,000 2,198,000 8,040,000
9-5
Sales 3,104,000 2,200,000 5,304,000
Total revenue 3,120,000 2,200,000 5,304,000
Other expenses 1,124,000 665,000 1,789,000
Loss on constructive 10,000 (2)
retirement of bonds 12,000 (3) 22,000

Net income 296,000 125,000 383,000
Noncontrolling interest 22,600 * (22,600)
Net income 296,000 125,000 38,000 - 22,600 360,400

Retained earnings, 1/1 1,650,000 700,000 700,000 (6) 160,000 (1) 1,810,000
Net income 296,000 125,000 38,000 - 22,600 360,400
* ($125,000 $12,000) x 20% = $22,600
Slide
9-6
Balance Sheet Company Company Debit Credit NCI Balances
300,000 (4)

Other assets 5,420,000 2,620,000 8,040,000
Total assets 6,930,000 2,620,000 8,040,000
9% bonds payable 500,000 300,000 (4) 200,000
Discount on bonds payable (20,000) 12,000 (3) (8,000)
Capital stock 3,000,000 1,000,000 1,000,000 (6) 3,000,000
NCI in net assets 1/1 ** 340,000 (6) 340,000 -
NCI in net assets 12/31 358,600 358,600
Total liab. & equity 6,930,000 2,620,000 2,198,000 2,198,000 8,040,000
** $300,000 ($700,000 - $500,000) x 20% = $340,000
Slide
9-7
Consolidated Statements Workpaper—2012
Worksheet entries for 2012.

1. Investment in S Company Stock 160,000
Beginning Retained Earnings—P Company 160,000
To establish reciprocity, or convert to equity
Retained earnings balance—January 1, 2012 $ 700,000

Retained earnings balance—date of acquisition 500,000
Increase in retained earnings 200,000
Percentage interest held by P Company 80%
Amount to establish reciprocity $ 160,000
Slide
9-8
2. Loss on Constructive Retirement of Bonds 10,000

Investment in S Company Bonds 10,000
To recognize the constructive loss not recorded by P Company
and adjust the bond investment to par value.

Discount on Bonds Payable 12,000
To recognize the constructive loss not recorded by the subsidiary and
adjust the intercompany bonds to par value.
Entries (2) and (3) recognize the constructive loss allocated to each company and
adjust bond investment and carrying value of the intercompany debt to par value.
Slide
9-9

4. Bonds Payable 300,000
To eliminate intercompany bond investment and liability.
5. Dividend Income 16,000

Dividends Declared—S Company 16,000
To eliminate intercompany dividends.
6. Beginning Retained Earnings—S Company 700,000
Common Stock—S Company 1,000,000
Investment in S Company Stock 1,360,000
Noncontrolling Interest in Equity 340,000
To eliminate investment account and create NCI.
Slide
9-10
Consolidated Statements Workpaper—2012 Complete Equity
Method
If the complete equity method is used, entry (1), the

reciprocity entry, is not needed and the following entry
replaces entry (5) above.
Equity in S Company Income 80,400

Dividends Declared 16,000
Investment in S Company Stock 64,400
To eliminate the intercompany income and dividends.
Slide
9-11
Consolidated Statements Workpaper —2013 Complete Equity
Method
Sales 3,104,000 2,200,000 5,304,000
Equity income 80,400 80,400 (3) -
Total revenue 3,184,400 2,200,000 5,304,000
Other expenses 1,124,000 665,000 1,789,000
Loss on retirement 22,000 (1) 22,000
Net income 360,400 125,000 383,000
Net income 360,400 125,000 102,400 - 22,600 360,400
Retained earnings, 1/1 1,810,000 700,000 700,000 (4) 1,810,000
Net income 360,400 125,000 102,400 - 22,600 360,400
Balance Sheet
300,000 (2)
Investment in S. Co. stock 1,424,400 64,400 (3) -
1,360,000 (4)
Other assets 5,420,000 2,620,000 8,040,000
Total assets 7,154,400 2,620,000 8,040,000
9% bonds payable 500,000 300,000 (2) 200,000
Discount on bonds payable (20,000) 12,000 (1) (8,000)
Capital stock 3,000,000 1,000,000 1,000,000 (4) 3,000,000
NCI in net assets 1/1 340,000 (4) 340,000 -
NCI in net assets 12/31 358,600 358,600
SlideTotal liab. & equity 7,154,400 2,620,000 2,102,400 2,102,400 8,040,000
9-12
Year Subsequent to Acquisition of Bonds, Entries on the
Books of Affiliated Companies—2013
P Company’s Books
Entries on June 30 and December 31
Cash 13,500
Interest Revenue 13,500
To record receipt of interest ($300,000 x 9% x 6/12).
Interest Revenue 1,250

To amortize premium on outstanding bonds ($10,000/ 8 periods).
Slide
9-13
Year Subsequent to Acquisition of Bonds, Entries on the
Books of Affiliated Companies—2013
S Company’s Books
Entries on June 30 and December 31
Interest Expense 22,500

Cash 22,500
To record payment of interest ($500,000 x 9% x 6/12).

To amortize discount on outstanding bonds ($20,000 / 8 periods).
Slide
9-14
Consolidated Statements Workpaper Entries
Worksheet entries for December 31, 2013.
1. Investment in S Company Stock 244,000

Beginning Retained Earnings—P Company 244,000
To establish reciprocity, or convert to equity

($805,000 - $500,000) x 80% = $244,000
2. Beginning Retained Earnings—P Company 10,000

To adjust beginning retained earnings for constructive loss (recorded in

prior year as workpaper entry only; see 2012 entry (2) and to adjust
investment to par.
Slide
9-15
3. Beginning Retained Earnings—P Company * 9,600

Beginning Noncontrolling Interest ** 2,400
Discount on Bonds Payable ($15,000 x 60%) 12,000
To adjust beginning retained earnings balances for unrecorded

constructive loss at beginning of the year (recorded in 2012 as workpaper
entry only; see 2012 entry (3)) and adjust intercompany bonds to par
value.
* ($12,000 x 80%)
** ($12,000 x 20%)
Slide
9-16
4. Investment in S Company Bonds 2,500

Interest Revenue ($1,250 + $1,250) 2,500
To reverse the amortization of premium on investment recorded by

P Company during the current year (and not needed by consolidated
entity since the constructive loss was recorded in its entirety in
2012).
Slide
9-17
5. Discount on Bonds Payable ($5,000 x 60%) 3,000

To reverse amortization of discount on bonds payable recorded

by S Company during current year (and not needed by consolidated
entity since the constructive loss was recorded in its entirety in 2012).
6. Interest Revenue * 27,000

To eliminate intercompany interest.
* ($45,000 x 60%) or ($13,500 + $13,500)
Slide
9-18
7. Bonds Payable ($500,000 x 60%) 300,000

To eliminate intercompany bond investment and bonds payable.

9. Beginning Retained Earnings—S Company 805,000

Common Stock—S Company 1,000,000
Investment in S Company Stock 1,444,000
Slide
9-19
Sales 3,546,000 2,020,000 5,566,000
Interest income 24,500 27,000 (6) 2,500 (4) -
Total revenue 3,618,500 2,020,000 5,566,000
Interest expense 50,000 3,000 (5) 20,000
27,000 (6)
Other expenses 1,124,500 630,000 1,754,500
Net income 454,000 140,000 551,500
Net income 454,000 140,000 75,000 32,500 28,600 522,900
Retained earnings, 1/1 10,000 (2)
P Company 1,796,000 9,600 (3) 244,000 (1) 2,020,400
S Company 805,000 805,000 (9) -
Net income 454,000 140,000 75,000 32,500 28,600 522,900
Balance Sheet
Investment in S Co. bonds 307,500 2,500 (4) 10,000 (2) -
300,000 (7)
Other assets 5,812,500 2,690,000 8,502,500
Total assets 7,320,000 2,690,000 8,502,500
9% bonds payable 500,000 300,000 (7) 200,000
Discount on bonds payable (15,000) 3,000 (5) 12,000 (3) (6,000)
Capital stock 3,000,000 1,000,000 1,000,000 (9) 3,000,000
NCI in net assets 1/1 2,400 (3) 361,000 (9) 358,600 -
NCI in net assets 12/31 375,200 375,200
Slide
9-20 Total liab. & equity 7,320,000 2,690,000 2,451,500 2,451,500 8,502,500
Interim Purchase of Intercompany Bonds
Had the bonds been held during 2012, P Company would have
amortized a portion of the premium and S Company would have
amortized a part of the discount.
Assuming that P Company amortized $500 and S Company
amortized $600 during 2012, the original workpaper entries (2)
and (3) for constructive losses) are modified as follows:
2. Loss on Constructive Retirement Bonds 10,000

Interest Revenue 500
Interest Expense 600
Slide
9-21
Interim Purchase of Intercompany Bonds
Notes:
1. The consolidated income statement will still show a total loss on
the constructive retirement of $22,000.
2. The credits to interest revenue and interest expense add back
the portion of the loss that was recorded by the individual
companies, but which is reported in total in 2012.
3. Failure to add back the $1,100 ($500 + $600) to the reported
income of the individual companies will result in reporting this
portion of the loss twice.
Slide
9-22
Notes Receivable Discounted
A company may issue a note to an affiliated company that

may then discount the note with an outside party.
OR
A company holding a note receivable from an outside party
may discount the note with an affiliated company.
From a consolidation point of view, a receivable held by one of

the affiliated companies should be reported in the
consolidated balance sheet only if the note is due from an
outside party.
Slide LO 3 Discounting a note issued to an affiliated

9-23 company with an outside company.
Stock Dividends Issued by a Subsidiary Company
Parent company records receipt of shares in a

memorandum entry only.
Subsidiary records the declaration of a stock dividend as

a transfer from retained earnings to one or more paid-in
capital accounts.
Amount transferred is dependent on whether the

dividend is a large or small stock dividend.
• For consolidated purposes, the stock dividend does not

alter the investor’s proportionate interest in the sub.
Slide
9-24
LO 4 Stock dividends issued by a subsidiary.
Illustration: Assume that P Company purchased 4,000

shares of S Company’s $100 par value common stock on
January 2, 2012, for $560,000. At the time of purchase, S
Company reported common stock and retained earnings
balances of $500,000 and $200,000, respectively. If
consolidated statements were prepared on January 2, 2012,
the investment eliminating entry would be:
Capital Stock—S Company 500,000

1/1 Retained Earnings—S Company 200,000
Investment in S Company 560,000
Slide
9-25
Illustration: Now assume that S Company reports net

income of $50,000 and declares a 30% stock dividend (1,500
shares) on December 31, 2012. S Company would record the
dividend as follows (par value):
Stock Dividend Declared (or R/E) 150,000

Capital Stock (1,500 shares $100) 150,000
The only entry made by P Company in 2012 is a memorandum

entry to record the receipt of 1,200 shares from S Company.
Slide
9-26
Worksheet Entries – Year Stock Dividends Are Declared
1. Capital Stock—S Company 120,000

Stock Dividends Declared—S Company 120,000
To reverse effects of stock dividend ($150,000 x 80%).
2. 1/1 Retained Earnings—S Company 200,000

To eliminate investment account and recognize noncontrolling interest.
Slide
9-27
Consolidated Statement Workpaper December 31, 2012

Net/consolidated income 240,000 50,000 290,000
Net income 240,000 50,000 - - 10,000 280,000

Retained earnings, 1/1
P Company 460,000 460,000
S Company 200,000 200,000 (2) -
Net income 240,000 50,000 - - 10,000 280,000
Dividends declared (150,000) 120,000 (1) (30,000) -
Retained earnings, 12/31 700,000 100,000 200,000 120,000 (20,000) 740,000
Balance Sheet
Investment in S Company 560,000 560,000 (2) -
Fixed assets 1,240,000 800,000 2,040,000
Total assets 1,800,000 800,000 2,040,000
Total liabilities 200,000 50,000 250,000
Capital stock
P Company 900,000 900,000
S Company 650,000 120,000 (1) 30,000 -
500,000 (2)
Retained earnings 700,000 100,000 200,000 120,000 (20,000) 740,000
NCI in net assets 1/1 140,000 (2) 140,000 -
NCI in net assets 12/31 150,000 150,000
Total liab. & equity 1,800,000 800,000 820,000 820,000 2,040,000
Slide
9-28
Stock Dividends Issued from Postacquisition Earnings
If the stock dividend had been more than retained

earnings ($200,000), some of the postacquisition
earnings of the subsidiary would have been capitalized.
FASB ASC paragraph 810-10-45-9:

Occasionally, subsidiary companies capitalize retained earnings
arising since acquisition, by means of a stock dividend or
otherwise. This does not require a transfer to capital surplus
on consolidation.
Slide
9-29
LO 6 Subsidiary stock dividends issued from postacquisition earnings.
Dividends from Preacquisition Earnings
Effects of a liquidating dividend on the consolidated statements

workpaper entries:
Assume that P Company acquired an 80% interest in S Company
on January 2, 2012, for $560,000. At the time of purchase, S
Company had capital stock and retained earnings in the amounts
of $500,000 and $200,000, respectively. During the first year
that the investment was held, S Company reported net income of
$200,000. On December 31, 2012, the subsidiary declared and
paid a cash dividend of $250,000.
Slide
9-30
LO 6 Subsidiary stock dividends issued from preacquisition earnings.
Liquidating dividends are accounted for as a return of

part of the original investment.
P Company’s Books
Cash 200,000
Dividend Income ($200,000 x 80%) 160,000
Investment in S Company ($50,000 x 80%) 40,000
To record receipt of a cash dividend from S Company.
This entry reduces the investment account to $520,000.
Slide
9-31
The December 31, 2012, eliminating entries are as follows:

To eliminate intercompany dividends.
2. Investment in S Company 40,000

To reverse the liquidating dividend.
Slide
9-32
The December 31, 2012, eliminating entries are as follows:
3. Beginning Retained Earnings—S Co. 200,000

To eliminate investment account and create noncontrolling
interest.
Slide
9-33
Subsidiary with Preferred and Common Stock Outstanding
Determining Equity Interest of Each Class of

Stockholders
Subsidiary company preferred shares not held by the parent
company are considered part of the noncontrolling interest.
In consolidation, each class of stockholders has an interest in

the net assets of the firm, so it is necessary to allocate:
 Subsidiary’s Stockholders’ Equity between preferred and
common stock interests.
 Retained Earnings and Net Income amounts to each class of

stockholders, based on dividend preference.
Slide LO 7 Allocating the purchase price between

9-34 common and preferred stockholders.
Consolidating with Preferred Stock Outstanding
Illustration: Assume the following information concerning

the capital accounts of S Company as of January 2, 2012:
8%, $100 par value preferred stock, cumulative,

nonparticipating, dividends in arrears for 2011,
call price is $103,5,000 shares outstanding $ 500,000
Common stock, $10 par value 1,000,000
Other contributed capital—excess on issue
of common stock over par 305,000
Retained earnings 200,000
Total stockholders’ equity $2,005,000

On January 2, 2012, P Company acquired 80% of the

outstanding common stock for $1,160,000 and 30% of the
outstanding preferred stock for $180,000. During the year, S
Company reported net income of $200,000 and declared no
cash dividends. The entry to record the purchase is:
P Company’s Books
Investment in S Co. preferred stock 180,000
Investment in S Co. Common Stock 1,160,000
Cash 1,340,000

Computation and Allocation of Difference Between Implied

and Book Value Acquired—Preferred Stock
Parent NCI Total
Date of Acquisition - 1/2/ 2012 30% 70% 100%
Purchase price and implied value $ 180,000 $ 420,000 $ 600,000
Less: Book value of equity acquired:
$100 par preferred stock - 8% (150,000) (350,000) (500,000)
Retained earnings ** (16,500) (38,500) (55,000)
Difference between implied and BV 13,500 31,500 45,000
Reduce Paid-in-Capital—Parent (13,500)
Reduce Noncontrolling Interest in Equity * (31,500)
Total allocated (45,000)
Balance 0 0 0
* Noncontrolling interest after adjustment $420,000 - $31,500 = $388,500

** ($103 call + $8 dividends in arrears - $100 par) x 5,000 shares = $11 x 5,000 = $55,000

Consolidated Statements Workpaper Entries—2012
Cost Method or Partial Equity Method
1a. Beginning Retained Earnings—S Co. 55,000

Preferred Stock—S Co. 500,000
Difference Between Implied and BV 45,000
Investment in S Co. Preferred Stock 180,000
To eliminate the preferred stock investment account and recognize
the noncontrolling interest in equity.

1b. Other Contributed Capital—P Company 13,500

Difference Between Implied and Book Value 45,000
To allocate the difference between implied and book values of
preferred stock to equity.

Computation and Allocation of Difference Between Implied

and Book Value Acquired—Common Stock
Parent NCI Total
Date of Acquisition - 1/2/2012 80% 20% 100%
Purchase price and implied value $ 1,160,000 $ 290,000 $ 1,450,000
Less: Book value of equity acquired:
$10 par common stock (800,000) (200,000) (1,000,000)
Contributed capital -common stock (244,000) (61,000) (305,000)
Retained earnings* (116,000) (29,000) (145,000)
Difference between implied and BV 0 0 0
* $200,000 - $55,000 = $145,000

2. Beginning Retained Earnings—S Co. 145,000

Common Stock—S Co. 1,000,000
Other Contributed Capital—S Co. 305,000
Investment in S Co. Common Stock 1,160,000
NCI in Equity 290,000
To eliminate the common stock investment account and recognize
NCI.

Noncontrolling interest in the consolidated income for 2012

is computed as follows:
Contribution
to Consolidated
Income NCI % NCI
Reported net income of S Company $ 200,000
Income allocated to preferred stock 40,000 70% $ 28,000
Income allocated to common stock $ 160,000 20% 32,000
NCI in consolidated income $ 60,000

Cost
Consolidating with Preferred Stock Outstanding Method
Page 1
Consolidated Statement Workpaper December 31, 2012
Net/consolidated income 800,000 200,000 1,000,000
Noncontrolling interest
in Dividend income
Preferred stock 28,000
Common stock 32,000 (60,000)
Net income 800,000 200,000 - - 60,000 940,000
P Company 1,450,000 1,450,000
S Company -
Preferred stock 55,000 55,000 (1a) -
Common stock 145,000 145,000 (2) -
Net income 800,000 200,000 60,000 940,000
Dividends declared (500,000) (500,000)
Retained earnings, 12/31 1,750,000 400,000 200,000 - 60,000 1,890,000
Balance Sheet
Investment in S Company
Common stock 1,160,000 1,160,000 (2) -
Difference Implied and BV 45,000 (1a) 45,000 (1b) -
Other assets 5,410,000 2,805,000 8,215,000
SlideTotal assets 6,750,000 2,805,000 8,215,000
9-43
Cost
Consolidating with Preferred Stock Outstanding Method
Page 2
P Company 1,450,000 1,450,000
S Company -
Preferred stock 55,000 55,000 -
Common stock 145,000 145,000 -
Net income 800,000 200,000 60,000 940,000
Dividends declared (500,000) (500,000)
Retained earnings, 12/31 1,750,000 400,000 200,000 - 60,000 1,890,000
Balance Sheet
Investment in S Company
Common stock 1,160,000 1,160,000 (2) -
Difference Implied and BV 45,000 (1a) 45,000 (1b) -
Other assets 5,410,000 2,805,000 8,215,000
Total assets 6,750,000 2,805,000 8,215,000
Total liabilities 1,600,000 600,000 2,200,000
Preferred stock S Co. 500,000 500,000 (1a) -
Common stock 3,000,000 1,000,000 1,000,000 (2) 3,000,000
Other contributed capital
P Company 400,000 13,500 (1b) 386,500
S Company 305,000 305,000 (2) -
Retained earnings 1,750,000 400,000 200,000 - 60,000 1,890,000
NCI in net assets 1/1 31,500 (1b) 420,000(1a) 678,500 -
290,000 (2)
NCI in net assets 12/31 738,500 738,500
SlideTotal liab. & equity 6,750,000 2,805,000 2,095,000 2,095,000 8,215,000
9-44
Copyright
Copyright © 2012 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
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and not for distribution or resale. The Publisher assumes no
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use of these programs or from the use of the information
contained herein.
Slide
9-45

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9

Advanced Accounting, Fifth Edition

Illustration: P Company acquired an 80% interest in S Company

Dec. 31 Investment in S Company Bonds 310,000

Compute the Constructive Gain or Loss

On the books of the The constructive loss

retirement of bonds 12,000 (3) 22,000

Retained Earnings Statement

* ($125,000 $12,000) x 20% = $22,600

Investment in S. Co. stock 1,200,000 160,000 (1) 1,360,000 (6) -

** $300,000 ($700,000 - $500,000) x 20% = $340,000

Worksheet entries for 2012.

Retained earnings balance—January 1, 2012 $ 700,000

Worksheet entries for 2012.

2. Loss on Constructive Retirement of Bonds 10,000

3. Loss on Constructive Retirement of Bonds 12,000

Worksheet entries for 2012.

5. Dividend Income 16,000

If the complete equity method is used, entry (1), the

Equity in S Company Income 80,400

Interest Revenue 1,250

Interest Expense 22,500

Interest Expense 2,500

Worksheet entries for December 31, 2013.

1. Investment in S Company Stock 244,000

To establish reciprocity, or convert to equity

2. Beginning Retained Earnings—P Company 10,000

To adjust beginning retained earnings for constructive loss (recorded in

Worksheet entries for December 31, 2013.

3. Beginning Retained Earnings—P Company * 9,600

To adjust beginning retained earnings balances for unrecorded

Worksheet entries for December 31, 2013.

4. Investment in S Company Bonds 2,500

To reverse the amortization of premium on investment recorded by

Worksheet entries for December 31, 2013.

5. Discount on Bonds Payable ($5,000 x 60%) 3,000

To reverse amortization of discount on bonds payable recorded

6. Interest Revenue * 27,000

To eliminate intercompany interest.

* ($45,000 x 60%) or ($13,500 + $13,500)

Worksheet entries for December 31, 2013.

7. Bonds Payable ($500,000 x 60%) 300,000

To eliminate intercompany bond investment and bonds payable.

8. Dividend Income 48,000

9. Beginning Retained Earnings—S Company 805,000

2. Loss on Constructive Retirement Bonds 10,000

A company may issue a note to an affiliated company that

From a consolidation point of view, a receivable held by one of

Slide LO 3 Discounting a note issued to an affiliated

Parent company records receipt of shares in a

Subsidiary records the declaration of a stock dividend as

Amount transferred is dependent on whether the

• For consolidated purposes, the stock dividend does not

Illustration: Assume that P Company purchased 4,000

Capital Stock—S Company 500,000

Illustration: Now assume that S Company reports net

Stock Dividend Declared (or R/E) 150,000

The only entry made by P Company in 2012 is a memorandum

Worksheet Entries – Year Stock Dividends Are Declared