Intercompany Indebtedness Chapter 08

Chapter 08 – Intercompany Indebtedness Chapter 08 Intercompany Indebtedness Answer Key Multiple Choice Questions 1. Cutler Company owns 80 percent of the common stock of Marina Inc. Cutler acquiressome of Marina’s bonds from an unrelated party for less than the carrying value on Marina’sbooks and holds them as a long-term investment. For consolidated reporting purposes, how isthe acquisition of Marina’s bonds treated?A. As a decrease in the Bonds Payable account on Marina’s books.B. As an increase in noncurrent assets.C. Everything related to the bonds is eliminated in the consolidation worksheet, and nothingrelated to the bonds appears in the consolidated financial statements.D. As a retirement of bonds.2. Culver owns 80 percent of the common stock of Fowler Company. Culver also purchasessome of Fowler’s bonds directly from Fowler and holds the bonds as a long-term investment.How is the acquisition of the bonds treated for consolidated reporting purposes?A. As a retirement of bonds.B. As an increase in the Bonds Payable account on Fowler’s books.C. Everything related to the bonds is eliminated in the consolidation worksheet, and nothingrelated to the bonds appears in the consolidated financial statements.D. As an increase in noncurrent assets.3. At the end of the year, a parent acquires a wholly owned subsidiary’s bonds fromunaffiliated parties at a cost less than the subsidiary’s carrying value. The consolidated netincome for the year of acquisition should include the parent’s separate operating income plus:A. the subsidiary’s net income increased by the gain on constructive retirement of debt.B. the subsidiary’s net income decreased by the gain on constructive retirement of debt.C. the subsidiary’s net income increased by the gain on constructive retirement of debt, anddecreased by the subsidiary’s bond interest expense.D. the subsidiary’s net income decreased by the gain on constructive retirement of debt, anddecreased by the subsidiary’s bond interest expense.4. A loss on the constructive retirement of a parent’s bonds by a subsidiary is effectivelyrecognized in the accounting records of the parent and its subsidiary:I. at the date of constructive retirement.II. over the remaining term of the bonds.A. IB. IIC. Both I and IID. Neither I nor II 8-1 Chapter 08 – Intercompany Indebtedness 5. When one company purchases the debt of an affiliate from an unrelated party, a gain or losson the constructive retirement of debt is recognized by which of the following? A. Option AB. Option BC. Option CD. Option D 6. Which of the following statements is (are) correct?I. The amount assigned to the noncontrolling interest may be affected by a constructiveretirement of bonds.II. A constructive retirement of bonds normally results in an extraordinary gain or loss.III. In constructive retirement, the bonds are considered outstanding, even though they aretreated as if they were retired in preparing consolidated financial statements.A. IB. IIC. I and IIID. I, II, and III 8-2 Chapter 08 – Intercompany Indebtedness 7. On January 1, 20X6, Nichols Corporation issued 10-year bonds at par to unrelated parties.The bonds pay interest of $15,000 every June 30 and December 31. On December 31, 20X9,Harn Corporation purchased all of Nichols’ bonds in the open market at a $6,000 discount.Harn is Nichols’ 80 percent owned subsidiary. Harn uses the straight line method ofamortization. The consolidated income statement for the year 20X9 should report with respectto the bonds:I. interest expense of $30,000.II. an extraordinary gain of $6,000.A. IB. IIC. Either I or IID. Neither I nor IILight Corporation owns 80 percent of Sound Company’s voting shares. On January 1, 20X7,Sound sold bonds with a par value of $300,000 at 95. Light purchased $200,000 par value ofthe bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay anannual interest rate of 6 percent. Interest is paid semiannually on January 1 and July 1. 8. Based on the information given above, what amount of interest expense should be reportedin the 20X8 consolidated income statement?A. $6,000B. $6,500C. $5,000D. $10,0009. Based on the information given above, what amount of interest receivable will be recordedby Light Corporation on December 31, 20X8, in its separate financial statements?A. $5,000B. $6,500C. $10,000D. $6,00010. Based on the information given above, what amount of interest expense will be eliminatedin the preparation of the 20X8 consolidated financial statements?A. $13,000B. $13,500C. $10,000D. $15,000 8-3 Chapter 08 – Intercompany Indebtedness Master Corporation owns 85 percent of Servant Corporation’s voting shares. On January 1,20X8, Master Corporation sold $200,000 par value 8 percent bonds to Servant for $245,000.The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.11. Based on the information given above, in the preparation of the 20X8 consolidatedfinancial statements, premium on bonds payable will be:A. debited for $45,000 in the eliminating entries.B. credited for $40,500 in the eliminating entries.C. debited for $40,500 in the eliminating entries.D. credited for $45,000 in the eliminating entries.12. Based on the information given above, in the preparation of the 20X8 consolidatedfinancial statements, interest income will be:A. debited for $11,500 in the eliminating entries.B. credited for $11,500 in the eliminating entries.C. debited for $16,000 in the eliminating entries.D. credited for $16,000 in the eliminating entries.13. Based on the information given above, what amount of investment in bonds will beeliminated in the preparation of the 20X8 consolidated financial statements?A. $240,500B. $200,000C. $245,000D. $211,500 8-4 Chapter 08 – Intercompany Indebtedness Moon Corporation issued $300,000 par value 10-year bonds at 107 on January 1, 20X3,which Star Corporation purchased. On July 1, 20X7, Sun Corporation purchased $120,000 ofMoon bonds from Star. The bonds pay 12 percent interest annually on December 31. Thepreparation of consolidated financial statements for Moon and Sun at December 31, 20X9,required the following eliminating entry: 8-5 Chapter 08 – Intercompany Indebtedness 14. Based on the information given above, what percentage of the subsidiary’s ownership doesthe parent company hold?A. 75 percentB. 65 percentC. 80 percentD. 95 percent 15. Based on the information given above, what amount did Sun pay when it purchased thebonds on July 1, 20X7?A. $118,020B. $118,920C. $118,620D. $117,220 16. Based on the information given above, what amount of gain or loss on bond retirement isincluded in the 20X7 consolidated income statement?A. $6,600B. $4,800C. $6,000D. $5,400 8-6 Chapter 08 – Intercompany Indebtedness 17. Based on the information given above, if 20X9 consolidated net income of $50,000 wouldhave been reported without the eliminating entry provided, what amount will actually bereported?A. $47,900B. $48,200C. $49,400D. $48,800 ABC, a holder of a $400,000 XYZ Inc. bond, collected the interest due on June 30, 20X8,and then sold the bond to DEF Inc. for $365,000. On that date, XYZ, a 90 percent owner ofDEF, had a $450,000 carrying amount for this bond. 18. Based on the information given above, what amount of gain or loss on bond retirementwas recorded?A. No gain or lossB. $85,000 gainC. $85,000 lossD. $35,000 loss 19. Based on the information given above, what was the effect of DEF’s purchase of XYZ’sbond on the noncontrolling interest amount reported in XYZ’s June 30, 20X8, consolidatedbalance sheet?A. No effectB. $35,000 increaseC. $8,500 decreaseD. $8,500 increase. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.Mortar Corporation purchased $140,000 of Granite’s bonds from the original purchaser onDecember 31, 20X8, for $125,000. Mortar owns 75 percent of Granite’s voting commonstock. 8-7 Chapter 08 – Intercompany Indebtedness 20. Based on the information given above, what amount of premium on bonds payable will beeliminated in the preparation of the 20X8 consolidated financial statements?A. $3,500B. $2,800C. $5,000D. $2,50021. Based on the information given above, what amount of gain or loss on bond retirementwill be reported in the 20X8 consolidated financial statements?A. $17,000 lossB. $12,800 lossC. $18,500 gainD. $22,200 gain22. Based on the information given above, what amount of premium on bonds payable will beeliminated in the preparation of the 20X9 consolidated financial statements?A. $3,500B. $2,800C. $5,000D. $2,500 23. Based on the information given above, what amount of interest income will be eliminatedin the preparation of the 20X9 consolidated financial statements?A. $17,000B. $13,300C. $18,500D. $22,20024. Based on the information given above, what amount of interest expense will beeliminated in the preparation of the 20X9 consolidated financial statements?A. $17,000B. $13,300C. $18,500D. $22,200AACSB: AnalyticBloom’s: ApplyDifficulty: 3 HardLearning Objective: 08-03 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount lessthan book value. 8-8 Chapter 08 – Intercompany Indebtedness 25. Based on the information given above, what amount of constructive gain will be allocatedto noncontrolling interest in 20X8 consolidated financial statements?A. $4,925B. $5,550C. $5,625D. $4,625 AACSB: AnalyticBloom’s: UnderstandDifficulty: 2 MediumLearning Objective: 08-03 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount lessthan book value. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.Mortar Corporation purchased $140,000 of Granite’s bonds from the original purchaser onJanuary 1, 20X8, for $122,000. Mortar owns 75 percent of Granite’s voting common stock. 8-9 Chapter 08 – Intercompany Indebtedness 26. Based on the information given above, what amount of premium on bonds payable will beeliminated in the preparation of the 20X8 year-end consolidated financial statements?A. $3,500B. $2,800C. $5,000D. $2,50027. Based on the information given above, what amount of gain or loss on bond retirementwill be reported in the 20X8 consolidated financial statements?A. $17,000B. $12,800C. $18,500D. $22,200 28. Based on the information given above, what amount of premium on bonds payable will beeliminated in the preparation of the 20X9 year-end consolidated financial statements?A. $3,500B. $2,800C. $5,000D. $2,500 29. Based on the information given above, what amount of interest income will be eliminatedin the preparation of the 20X9 consolidated financial statements?A. $17,000B. $13,300C. $18,500D. $22,200 Hunter Corporation holds 80 percent of the voting shares of Moss Company. On January 1,20X8, Moss purchased $100,000 par value 12 percent first mortgage bonds of Hunter fromCruse for $115,000. Hunter originally issued the bonds to Cruse on January 1, 20X6, for$110,000. The bonds have an 8-year maturity from the date of issue. Moss reported netincome of $65,000 for 20X8, and Hunter reported income (excluding income from ownershipof Moss’s stock) of $90,000. 8-10 Chapter 08 – Intercompany Indebtedness 30. Based on the information given above, what amount of interest expense does Hunterrecord annually?A. $10,750B. $9,500C. $2,500D. $12,000 31. Based on the information given above, what amount of interest income does Moss recordfor 20X8?A. $12,000B. $2,500C. $7,500D. $9,500 32. Based on the information given above, what gain or loss on the retirement of bonds shouldbe reported in the 20X8 consolidated income statement?A. $6,250 gainB. $7,500 gainC. $7,500 lossD. $6,250 loss 33. Based on the information given above, what amount of consolidated net income should bereported for 20X8?A. $163,750B. $161,250C. $146,250D. $148,750 8-11 Chapter 08 – Intercompany Indebtedness Senior Corporation acquired 80 percent of Junior Company’s voting shares on January 1,20X8, at underlying book value. On that date, it also purchased $500,000 par value 8 percentJunior bonds, which had been issued on January 1, 20X5, with a 12-year maturity. Duringpreparation of the consolidated financial statements for December 31, 20X8, the followingeliminating entry was made in the worksheet: 8-12 Chapter 08 – Intercompany Indebtedness 34. Based on the information given above, what price did Senior pay to purchase the Juniorbonds?A. $530,000B. $516,875C. $533,750D. $550,625 35. Based on the information given above, what was the carrying amount of the bonds onJunior’s books on the date of purchase?A. $533,750B. $516,875C. $545,000D. $550,625 8-13