江西财经大学高级财务会计国际学院题库chapter07

1、Advanced Accounting, 11e (Beams/Anthony/Bettinghaus/Smith)Chapter 7 Intercompany Profit Transactions - BondsMultiple Choice Questions1) If the price paid by a parent company to acquire the debt of a subsidiary is greater than the book value of the liability, a _ occurs.A) realized loss on the retire

2、ment of debt from the viewpoint of the subsidiaryB) realized gain on the retirement of debt from the viewpoint of the subsidiaryC) constructive loss on the retirement of debt from the viewpoint of the consolidated entityD) constructive gain on the retirement of debt from the viewpoint of the consoli

3、dated entityAnswer: CObjective: LO1Difficulty: Easy2) If an affiliate purchases bonds in the open market, the book value of the intercompany bond liability at the time of purchase isA) always assigned to the parent company because it has control.B) the par value of the bonds less the unamortized dis

4、count or plus the unamortized premium.C) par value.D) the par value of the bonds plus the unamortized discount or less the unamortized premium.Answer: BObjective: LO1Difficulty: Easy3) Bonds issued by a company remain on their books as a liability, but are considered constructively retired whenA) th

5、e company borrows money from unaffiliated entities to re-purchase its own bonds at a gain.B) The company borrows money from an affiliate to re-purchase its own bonds at a gain.C) The company's parent or subsidiary purchases the bonds from outside entities.D) The company borrows money from an aff

6、iliate to repurchase its own bonds at a gain or at a loss.Answer: CObjective: LO1Difficulty: EasyUse the following information to answer the question(s) below.Pascalian Company owns a 90% interest in Sapp Company. On January 1, 2010, Pascalian had $300,000, 6% bonds outstanding with an unamortized p

7、remium of $9,000. The bonds mature on December 31, 2014. Sapp acquired one-third of Pascalian's bonds in the open market for $97,000 on January 1, 2010. Both companies use straight-line amortization of bond discounts/premiums. Interest is paid on December 31. On December 31, 2010, the books of t

8、he two affiliates held the following balances:Pascalian's books6% bonds payable$300,000Premium on bonds7,200Interest expense16,200Sapp's booksInvestment in Pascalian bonds$ 97,600Interest income6,6004) The gain from the bond purchase that appeared on the December 31, 2010 consolidated income

9、 statement wasA) $4,320.B) $4,800.C) $5,400.D) $6,000.Answer: DExplanation: D) Book value of Pascalian's bonds acquired by Sapp equals 1/3times ($300,000 + $9,000)$103,000Less: Cost of acquiring Pascalian bonds( 97,000)Constructive gain on bonds$ 6,000Objective: LO2Difficulty: Moderate5) Consoli

10、dated Interest Expense and consolidated Interest Income, respectively, that appeared on the consolidated income statement for the year ended December 31, 2010 wasA) $10,800 and $0.B) $10,800 and $6,600.C) $0 and $0.D) $16,200 and $6,600.Answer: AExplanation: A) Consolidated interest expense =$16,200

11、 × 2/3$10,800Objective: LO2Difficulty: Moderate6) Prussia Corporation owns 80% the voting stock of Stad Corporation. On January 1, 2010, Prussia paid $391,000 cash for $400,000 par of Stad's 10% $1,000,000 par value outstanding bonds, due on April 1, 2015. Stad's bonds had a book value

12、of $1,045,000 on January 1, 2010. Straight-line amortization is used. The gain or loss on the constructive retirement of $400,000 of Stad bonds on January 1, 2010 was reported in the 2010 consolidated income statement in the amount ofA) $14,000.B) $21,600.C) $23,000.D) $27,000.Answer: DObjective: LO

13、2Difficulty: ModerateUse the following information to answer the question(s) below.Pfadt Inc. had $600,000 par of 8% bonds payable outstanding on January 1, 2011 due January 1, 2015 with an unamortized discount of $12,000. Senat is a 90%-owned subsidiary of Pfadt. On January 2, 2011, Senat Corporati

14、on purchased $150,000 par value of Pfadt's outstanding bonds for $152,000. The bonds have interest payment dates of January 1 and July 1. Straight-line amortization is used.7) With respect to the bond purchase, the consolidated income statement of Pfadt Corporation and Subsidiary for 2011 showed

15、 a gain or loss ofA) $ 4,500.B) $ 5,000.C) $10,800.D) $12,000.Answer: BExplanation: B) ($588,000 × 0.25) -$152,000Objective: LO2Difficulty: Moderate8) Bond Interest Receivable for 2011 of Pfadt's bonds on Senat's books wasA) $5,400.B) $6,000.C) $10,800.D) $12,000.Answer: BExplanation: B

16、) $150,000 × 8% × 1/2Objective: LO2Difficulty: Moderate9) Bonds Payable appeared in the December 31, 2011 consolidated balance sheet of Pfadt Corporation and Subsidiary in the amount ofA) $398,925.B) $441,000.C) $443,250.D) $450,000.Answer: CExplanation: C) $591,000 × 75%Objective: LO

17、2Difficulty: ModerateUse the following information to answer the question(s) below.Plenty Corporation issued six thousand, $1,000 par, 6% bonds on January 1, 2010, at par. Interest is paid on January 1 and July 1 of each year; the bonds mature on January 1, 2015. On January 2, 2012, Scrawn Corporati

18、on, a 75%-owned subsidiary of Plenty, purchased 3,000 of the bonds on the open market at 102.50. Plenty's separate net income for 2012 included the annual interest expense for all 3,000 bonds. Scrawn's separate net income for 2012 was $400,000, which included the bond interest received on Ju

19、ly 1 as well as the accrual of bond interest revenue earned on December 31. Both companies use straight-line amortization of bond discounts/premiums.10) What was the amount of gain or (loss) from the intercompany purchase of Plenty's bonds on January 2, 2012?A) $(56,250)B) $(75,000)C) $ 75,000D)

20、 $ 56,250Answer: BExplanation: B) Total book value acquired =$6,000,000 × 50% $3,000,000Purchase price 3,000 × $1,025 3,075,000Loss on constructive retirement$ 75,000Objective: LO2Difficulty: Moderate11) If the bonds were originally issued at 106, and 80% of them were purchased by Scrawn o

21、n January 2, 2013 at 98, the gain or (loss) from the intercompany purchase wasA) $(384,000).B) $(211,200).C) $ 211,200.D) $ 384,000.Answer: CExplanation: C) Book value at January 2, 2013 equals $6,360,000 minus $216,000= $6,144,000Percentage of bonds acquired 80%Equals book value acquired4,915,200Pu

22、rchase price 4,800 bonds × $980= 4,704,000Gain on constructive retirement=$ 211,200Objective: LO2Difficulty: Moderate12) If the bonds were originally issued at 103, and 70% of them were purchased on January 2, 2014 at 104, the constructive gain or (loss) on the purchase wasA) $(142,800).B) $( 4

23、2,000).C) $ 42,000.D) $ 142,800.Answer: AExplanation: A) Book value at January 2, 2014 equals $6,180,000 minus $144,000 $6,036,000Percentage of bonds acquired 70%Equals book value acquired 4,225,200Purchase price 4,200 bonds × $1,040 4,368,000Loss on constructive retirement $ 142,800Objective:

24、LO2Difficulty: Moderate13) Using the original information, the amount of consolidated Interest Expense for 2012 wasA) $ 135,000.B) $ 180,000.C) $ 270,000.D) $ 360,000.Answer: BExplanation: B) ($6,000,000 - $3,000,000) × 6%Objective: LO2Difficulty: Moderate14) Using the original information, the

25、 balances for the Bonds Payable and Bond Interest Payable accounts, respectively, on the consolidated balance sheet for December 31, 2013 wereA) $3,000,000 and $ 90,000.B) $3,000,000 and $180,000.C) $6,000,000 and $ 90,000.D) $6,000,000 and $180,000.Answer: AExplanation: A) Bonds payable $6,000,000

26、minus bonds held by Scrawn of $3,000,000. Interest accrued on December 31, 2013 will be the interest on bonds held by non-affiliates or $3,000,000 × 6% × 1/2 yearObjective: LO2, 3Difficulty: Moderate15) Using the original information, the elimination entries on the consolidation working pa

27、pers prepared on December 31, 2012 included at leastA) debit to Bond Interest Expense for $360,000.B) credit to Bond Interest Expense for $180,000 and a debit to Bond Interest Payable for $90,000.C) credit to Bond Interest Receivable for $180,000.D) debit to Bond Interest Revenue for $360,000.Answer

28、: BObjective: LO2Difficulty: Moderate16) No constructive gain or loss arises from the purchase of an affiliate's bonds if theA) affiliate is a 100%-owned subsidiary.B) bonds are purchased at book value.C) bonds are purchased with arm's-length bargaining from outside entities.D) gain or loss

29、cannot be reasonably estimated.Answer: BObjective: LO1Difficulty: Easy17) There are several theories for allocating constructive gains or losses between purchasing and issuing affiliates. The Agency TheoryA) does so based on the par value of the bonds purchased.B) assigns the entire constructive gai

30、n or loss to the parent based on their control of the decision to purchase the bonds.C) assigns the entire constructive gain or loss to the subsidiary based on the need to have the noncontrolling interest share in the retirement of the debt.D) assigns the entire constructive gain or loss to whicheve

31、r company issued the bonds.Answer: DObjective: LO1Difficulty: Easy18) Pickle Incorporated acquired a $10,000 bond originally issued by its 80%-owned subsidiary on January 2, 2011. The bond was issued in a prior year for $11,250, matures January 1, 2016, and pays 9% interest at December 31. The bond&

32、#39;s book value at January 2, 2011 is $10,625, and Pickle paid $9,500 to purchase it. Straight-line amortization is used by both companies. How much interest income should be eliminated in 2011?A) $720B) $800C) $900D) $1,000Answer: DExplanation: D) $9,500 - $10,000 = discount to amortize as interes

33、t expense over 5 years, or $100 per year + $900 paid by issuer.Objective: LO2, 3Difficulty: ModerateUse the following information to answer the question(s) below.Poe Corporation owns an 80% interest in Seri Company acquired at book value several years ago. On January 2, 2011, Seri purchased $100,000

34、 par of Poe's outstanding 10% bonds for $103,000. The bonds were issued at par and mature on January 1, 2014. Straight-line amortization is used. Separate incomes of Poe and Seri for 2011 are $350,000 and $120,000, respectively. Poe uses the equity method to account for the investment in Seri.19

35、) Controlling interest share of consolidated net income for 2011 wasA) $443,600.B) $444,000.C) $444,400.D) $448,000.Answer: BExplanation: B) Poe's separate income$ 350,000 Income from Seri ($120,000 × 80%) 96,000 Less: Loss on constructive retirement of Poe bonds(3,000)Plus: Piecemeal recog

36、nition of the constructive loss ($3,000/3 years) 1,000 Controlling interest share$ 444,000 Objective: LO4Difficulty: Moderate20) Noncontrolling interest share for 2011 wasA) $23,000.B) $23,600.C) $24,000.D) $24,400.Answer: CExplanation: C) Since Poe is the issuing entity, the gain or loss is not all

37、ocated to the noncontrolling interest. The noncontrolling interest share is ($120,000 × 20%) = $24,000.Objective: LO4Difficulty: ModerateExercises1) Separate company and consolidated income statements for Pitta and Sojourn Corporations for the year ended December 31, 2011 are summarized as foll

38、ows: Pitta Soujourn Consolidated Sales Revenue$ 500,000$ 100,000$ 600,000Income from Sojourn19,900Bond interest income6,000Gain on bond retirement3,000Total revenues519,900106,000603,000Cost of sales$ 280,000$ 50,000$ 330,000Bond interest expense9,0003,600Other expenses 120,900 31,000 151,900Total e

39、xpenses 409,900 81,000 485,500Consolidated net income 117,500Noncontrolling interest share 7,500 Separate net income andControl. interest share in consolidated net income$ 110,000 $ 25,000$ 110,000The interest income and expense eliminations relate to a $100,000, 9% bond issue that was issued at par

40、 value and matures on January 1, 2016. On January 2, 2011, a portion of the bonds was purchased and constructively retired.Required: Answer the following questions.1.Which company is the issuing affiliate of the bonds payable?2.What is the gain or loss from the constructive retirement of the bonds p

41、ayable that is reported on the consolidated income statement for 2011?3.What portion of the bonds payable is held by nonaffiliates at December 31, 2011?4.Is Sojourn a wholly-owned subsidiary? If not, what percentage does Pitta own?5.Does the purchasing affiliate use straight-line or effective intere

42、st amortization?6.Explain the calculation of Pitta's $19,900 income from Sojourn.Answer: 1.Pitta is the issuing affiliate.2.Effect on consolidated net income:Gain on constructive retirement of bonds$ 3,0003.Percent of bonds held by nonaffiliates at December 31, 2011 is 40%, computed as $3,600 co

43、nsolidated interest expense divided by $9,000 interest expense of Pitta.4.Sojourn is partially owned as evidenced by the noncontrolling interest share. The ownership percentage is 70% ($7,500 noncontrolling interest share divided by $25,000 income of Sojourn = 30% noncontrolling interest.)5.Straight

44、-line amortization$100,000 par × 60% purchased$60,000Purchase price 5 years before maturity 57,000Gain 3,000Nominal interest ($60,000 × 9%)$ 5,400Discount amortization ($3,000/5 years) 600Bond interest income $ 6,0006.Pitta's income from SojournShare of Sojourn's reported income($2

45、5,000 × 70%) =$17,500Add: Constructive gain3,000Less: Piecemeal recognition of constructive gain (600) Income from Sojourn$19,900Objective: LO1, 2, 4Difficulty: Moderate2) Platts Incorporated purchased 80% of Scarab Company several years ago when the fair value equaled the book value. On Januar

46、y 1, 2010, Scarab has $100,000 of 8% bonds that were issued at face value and have five years to maturity. Interest is paid annually on December 31. Both Platts and Scarab would use the straight-line method to amortize any premium or discount incurred in the issuance or purchase of bonds. On January

47、 1, 2011, Platts purchased all of Scarab's bonds for $96,000.Required:1.Prepare the journal entries in 2011 that would be recorded by Platts and Scarab on their separate financial records.2.Prepare the consolidating working paper entries required for the year ending December 31, 2011.Answer: Req

48、uirement 1:Platts entries:1/1/11Investment in bonds$96,000Cash$96,00012/31/11Cash8,000Interest income 8,000Investment in bonds1,000Interest income 1,000Scarab entries:12/31/11Interest expense 8,000Cash 8,000Requirement 2:Consolidating entries:12/31/11Bonds payable100,000Investment in bonds97,000Gain

49、 on retirement of debt3,000Interest income9,000Interest expense8,000Gain on retirement of debt1,000Objective: LO2, 3Difficulty: Moderate3) Paka Corporation owns an 80% interest in Sandra Company. Paka acquired Sandra's bonds on January 2, 2011. The following information is from the adjusted tria

50、l balances at December 31, 2011, at which time the bonds have three years to maturity. The bonds have interest payment dates of January 1 and July 1. Straight-line amortization is used by both companies. Paka Sandra Investment in Sandra Bonds, $100,000 par98,5007% Bonds payable, $200,000200,000Bond

51、premium6,000Interest expense12,000Interest receivable7,000Interest income7,500Interest payable7,000Required:Prepare the necessary consolidation working paper entries on December 31, 2011 with respect to the intercompany bonds.Answer: 2011 Debit Credit 12/31Bond Interest Payable7,000Bond Interest Rec

52、eivable7,00012/31Bonds Payable100,000Interest Income7,500Bond premium3,000Interest Expense (50% owned)6,000Investment in Sandra's Bonds 98,500Gain on retirement of bonds6,000Supporting Computations:Cost of bonds to Paka ($98,500 - $500)$98,000Book value acquired 1/1/2011 where $2,000 per year is

53、 amortized($200,000 + $8,000) × 50% =104,000Gain on constructive bond retirement$6,000Objective: LO2, 3Difficulty: Moderate4) Pheasant Corporation owns 80% of Sal Corporation's outstanding common stock that was purchased at book value equal to fair value on January 1, 2005.Additional inform

54、ation:1.Pheasant sold inventory items that cost $3,000 to Sal during 2012 for $6,000. One-half of this merchandise was inventoried by Sal at year-end. At December 31, 2012, Sal owed Pheasant $2,000 on account from the inventory sales. No other intercompany sales of inventory have occurred since Phea

55、sant acquired its interest in Sal.2.Pheasant sold equipment with a book value of $5,000 and a 5-year useful life to Sal for $10,000 on December 31, 2010. The equipment remains in use by Sal and is depreciated by the straight-line method. The equipment has no salvage value.3.On January 2, 2012, Sal p

56、aid $10,800 for $10,000 par value of Pheasant's 10-year, 10% bonds. These bonds were originally sold at par value, and have interest payment dates of January 1 and July 1, and mature on January 1, 2016. Straight-line amortization has been applied by Sal to the Pheasant bond investment.4.Pheasant uses the equity method in accounting for its investment in Sal.Required:Complete the working papers to consolidate the financial statements of Pheasant Corporation and Sal for the year ended December 31