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    Advanced Accounting 7e Hoyle - Chapter 6

    Uploaded by

    Leni Rosiyani
    The document discusses intercompany debt transactions and how to account for them in consolidated financial statements. It addresses direct loans between affiliates, acquiring an affiliate's debt from outside parties, and preparing the consolidated statement of cash flows. Key points covered include eliminating intercompany balances, recording losses on debt extinguishment, adjusting for amortization over time, and treatment of noncontrolling interests.

    Copyright:

    © All Rights Reserved
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    Advanced Accounting 7e Hoyle - Chapter 6

    Uploaded by

    Leni Rosiyani
    517 views13 pages
    The document discusses intercompany debt transactions and how to account for them in consolidated financial statements. It addresses direct loans between affiliates, acquiring an affiliate's debt from outside parties, and preparing the consolidated statement of cash flows. Key points covered include eliminating intercompany balances, recording losses on debt extinguishment, adjusting for amortization over time, and treatment of noncontrolling interests.

    Original Title

    PPT Advanced Accounting 7e Hoyle_chapter 6

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    The document discusses intercompany debt transactions and how to account for them in consolidated financial statements. It addresses direct loans between affiliates, acquiring an affiliate's debt from outside parties, and preparing the consolidated statement of cash flows. Key points covered include eliminating intercompany balances, recording losses on debt extinguishment, adjusting for amortization over time, and treatment of noncontrolling interests.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    517 views13 pages

    Advanced Accounting 7e Hoyle - Chapter 6

    Uploaded by

    Leni Rosiyani
    The document discusses intercompany debt transactions and how to account for them in consolidated financial statements. It addresses direct loans between affiliates, acquiring an affiliate's debt from outside parties, and preparing the consolidated statement of cash flows. Key points covered include eliminating intercompany balances, recording losses on debt extinguishment, adjusting for amortization over time, and treatment of noncontrolling interests.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 13
    At a glance
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    The key takeaways are about the accounting treatment for intercompany debt transactions in consolidated financial statements, including direct loans between affiliates, acquisition of an affiliate's debt from outside parties, and adjustments needed in subsequent years.

    Direct loans between affiliated parties create no special consolidation problems. The corresponding receivable and payable should be eliminated from the consolidated financial statements, along with any related interest effects.

    The acquired debt must be treated as if it has been extinguished. Any related loss should be recorded in the consolidated financial statements in the year of acquisition as an extraordinary item, if material.

    Slide

    6-1

    Chapter Six

    InterCompany
    Debt
    Transactions
    McGraw-Hill/Irwin

    The McGraw-Hill Companies, Inc.

    Slide
    6-2

    Chapter 6
    Inter-Company Debt Transactions

    Direct loans between


    affiliated parties create no
    special consolidation
    problems.
    Eliminate the corresponding

    receivable and payable from


    the consolidated financial
    statements.

    McGraw-Hill/Irwin

    Also eliminate the effects of


    any related interest.

    The McGraw-Hill Companies, Inc.

    Slide
    6-3

    Acquisition of Affiliates Debt from


    an Outside Party
    In
    Ineffect,
    effect,the
    theSub
    Sub
    has
    hasissued
    issuedthe
    the
    debt
    debt indirectly
    indirectlyto
    to
    the
    theParent.
    Parent. How
    How
    should
    shouldthis
    thisbe
    be
    accounted
    accountedfor?
    for?

    Parent
    (3) Investors
    sell the
    bonds to the
    parent
    company.

    (1) 80%
    Ownership

    (2) Assume the


    Sub issued
    bonds to outside
    investors.
    McGraw-Hill/Irwin

    Sub

    The McGraw-Hill Companies, Inc.

    Slide
    6-4

    Acquisition of Affiliates Debt from


    an Outside Party

    The
    Theacquired
    acquireddebt
    debtmust
    mustbe
    be

    treated
    treatedas
    asifif itithas
    hasbeen
    been
    extinguished.
    extinguished.

    Any
    Anyrelated
    related loss
    loss related
    relatedto
    tothis
    this
    early
    earlyextinguishment
    extinguishment of
    of debt
    debtis
    is
    recorded
    recorded in
    in the
    theconsolidated
    consolidated
    financial
    financialstatements
    statementsin
    inthe
    theyear
    yearof
    of
    acquisition.
    acquisition.(see
    (seeAPB
    APBOpinion
    Opinion26)
    26)

    IfIf material,
    material,the
    the loss
    lossis
    is treated
    treatedas
    as
    an
    anextraordinary
    extraordinaryitem.
    item.

    McGraw-Hill/Irwin

    The McGraw-Hill Companies, Inc.

    Slide
    6-5

    Acquisition of Affiliates Debt from


    an Outside Party

    Big
    Big owns
    owns 90%
    90% of
    of Little.
    Little. On
    On 1/1/00,
    1/1/00, Little
    Little issued
    issued $2
    $2
    million
    million of
    of 6%,
    6%, 10-year
    10-year bonds.
    bonds. The
    The current
    current
    carrying
    carrying amount
    amount on
    on Littles
    Littles books
    books at
    at 1/1/04
    1/1/04 is:
    is:
    Bonds
    BondsPayable
    Payable==$2,000,000
    $2,000,000
    Bond
    Bond Discount
    Discount== $161,043
    $161,043
    Carrying
    CarryingAmount
    Amount== $1,838,957
    $1,838,957

    On
    On 1/2/04,
    1/2/04, Big
    Big decides
    decides to
    to re-purchase
    re-purchase Littles
    Littles
    bonds
    bonds from
    from the
    the market,
    market, effectively
    effectively extinguishing
    extinguishing
    the
    the debt.
    debt.
    Note
    Note The
    The Straight-line
    Straight-line Method
    Method is
    is used
    used to
    to
    amortize
    amortize any
    any premiums/discounts
    premiums/discounts
    Continue
    McGraw-Hill/Irwin

    The McGraw-Hill Companies, Inc.

    Slide
    6-6

    Acquisition of Affiliates Debt from


    an Outside Party
    On
    On 1/2/04,
    1/2/04, the
    the market
    market rate
    rate is
    is 5%,
    5%, and
    and Big
    Big
    pays
    pays $2,101,514
    $2,101,514 for
    for the
    the bonds.
    bonds. Since
    Since
    Littles
    Littles carrying
    carrying value
    value is
    is $1,838,957,
    $1,838,957,
    there
    there is
    is an
    an effective
    effective loss
    loss of
    of $262,557
    $262,557 to
    to
    be
    be recorded
    recorded by
    by the
    the consolidated
    consolidated entity.
    entity.
    At
    At 12/31/04,
    12/31/04, the
    the consolidated
    consolidated entity
    entity must:
    must:

    Record
    Record the
    theloss
    lossof
    of$262,557
    $262,557

    Eliminate
    Eliminatethe
    therelated
    relatedintercompany
    intercompanydebt
    debt at
    at

    BV
    BV

    Eliminate
    Eliminatethe
    theintercompany
    intercompanyinterest
    interest

    Continue
    McGraw-Hill/Irwin

    The McGraw-Hill Companies, Inc.

    Slide
    6-7

    Acquisition of Affiliates Debt from


    an Outside Party
    Entry
    Entry B
    B

    This
    Thisentry
    entryis
    ismade
    madeat
    at the
    theend
    endof
    ofthe
    the year
    yearthat
    thatthe
    thedebt
    debt is
    is
    extinguished
    extinguished
    We
    Wewill
    willassume
    assumethat
    thatany
    anygains/losses
    gains/losses from
    from this
    this
    transaction
    transaction belong
    belongto
    tothe
    theparent.
    parent. Thus,
    Thus, there
    there will
    will be
    be
    no
    noeffect
    effect on
    onNoncontrolling
    NoncontrollingInterest.
    Interest.

    McGraw-Hill/Irwin

    The McGraw-Hill Companies, Inc.

    Slide
    6-8

    Acquisition of Affiliates Debt from


    an Outside Party
    Entry
    Entry*B
    *B(Subsequent
    (SubsequentYears)
    Years)
    Adjust
    Adjust the
    theBVs
    BVsof
    ofthe
    theBonds
    BondsPayable
    Payableand
    andthe
    the
    Investment
    Investmentin
    inBonds
    Bonds to
    to reflect
    reflectamortization.
    amortization.
    Also,
    Also,the
    theloss
    lossis
    isnow
    now reflected
    reflectedin
    inR/E,
    R/E,which
    whichmust
    mustalso
    also
    be
    beadjusted
    adjustedfor
    for the
    thedifference
    differencein
    ininterest
    interest amounts.
    amounts.

    McGraw-Hill/Irwin

    The McGraw-Hill Companies, Inc.

    Slide
    6-9

    Acquisition of Affiliates Debt from


    an Outside Party
    Entry
    Entry*B
    *B(Subsequent
    (SubsequentYears)
    Years)
    Adjust
    Adjust the
    theBVs
    BVsof
    ofthe
    theBonds
    BondsPayable
    Payableand
    andthe
    the
    Investment
    Investmentin
    inBonds
    Bonds to
    to reflect
    reflectamortization.
    amortization.
    Also,
    Also,the
    theloss
    lossis
    isnow
    now reflected
    reflectedin
    inR/E,
    R/E,which
    whichmust
    mustalso
    also
    be
    beadjusted
    adjustedfor
    for the
    thedifference
    differencein
    ininterest
    interest amounts.
    amounts.

    Note
    Notethat,
    that,over
    over the
    theremaining
    remaininglife
    life of
    of the
    thebonds,
    bonds,
    the
    thebook
    bookvalues
    valueswill
    will eventually
    eventuallyconverge
    convergeto
    tothe
    the
    point
    pointwhere
    wherethe
    theadjustment
    adjustment to
    toR/E
    R/Ewill
    will be
    be
    amortized
    amortized away
    awaycompletely.
    completely.
    McGraw-Hill/Irwin

    The McGraw-Hill Companies, Inc.

    Slide
    6-10

    Consolidated Statement of Cash


    Flows
    The consolidated
    statement of cash flows
    is based on the
    consolidated balance
    sheet and the
    consolidated income
    statement.

    McGraw-Hill/Irwin

    The McGraw-Hill Companies, Inc.

    Slide
    6-11

    Consolidated Statement of Cash


    Flows
    Noncontrolling
    Noncontrolling Interest
    Interest

    Add
    Add back
    back the
    the
    noncontrolling
    noncontrolling
    interests
    interests share
    share of
    of the
    the
    subs
    subs net
    net income.
    income.

    Deduct
    Deduct dividends
    dividends paid
    paid
    to
    to the
    the outside
    outside owners
    owners
    as
    as aa cash
    cash outflow.
    outflow.

    McGraw-Hill/Irwin

    The McGraw-Hill Companies, Inc.

    Slide
    6-12

    Consolidated Statement of Cash


    Flows

    Amortization
    Amortization
    Add
    Add amortization
    amortization of
    of
    goodwill
    goodwill and
    and FMV
    FMV
    allocations
    allocations to
    to
    Consolidated
    Consolidated Net
    Net
    Income.
    Income.
    McGraw-Hill/Irwin

    The McGraw-Hill Companies, Inc.

    Slide
    6-13

    Consolidated Statement of Cash


    Flows
    Intercompany Transactions

    McGraw-Hill/Irwin

    Intercompany cash flows


    should not be included on the
    statement of cash flows.
    The intercompany cash flows
    are already eliminated from
    the balance sheet, so no
    additional effects appear on
    the statement of cash flows.

    The McGraw-Hill Companies, Inc.

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