10 - 0

Advanced Accounting
by Debra Jeter and Paul Chaney
Chapter 10: Consolidated Financial
Statements - Miscellaneous Topics
Slides Authored by Hannah Wong, Ph.D.
Rutgers University
10 - 1
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
10 - 2
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.
10 - 3
Computation of Constructive Gain/Loss
Book value
Par value
Purchase price
Constructive gain/loss
allocated to issuing company
Constructive gain/loss
allocated to
purchasing company
10 - 4
Accounting for Intercompany Bonds
P acquired Ss
9% bonds
12/31/2001
An Example
Par value of bonds acquired = $500,000 x 60%
Book value of bonds acquired = $480,000 x 60%
Purchase price = $310,000

12/31/2003
Bond
matures
10 - 5
Accounting for Intercompany Bonds
Book value
$288,000
Par value
$300,000
Purchase price
$310,000
Constructive loss
allocated to S Company
Constructive loss
allocated to P Company
$12,000
$10,000
10 - 6
Accounting for Intercompany Bonds
Loss on constructive retirement of bonds 10,000
Investment in S Bonds 10,000
(1) To recognize the constructive loss not recorded by S 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 P and
(2) adjust the intercompany bonds to par value
Year of Intercompany Bond Purchase - EEs
10 - 7
Accounting for Intercompany Bonds
Bonds payable 300,000
Investment in S Bonds 300,000
To eliminate intercompany bond investment and liability
Year of Intercompany Bond Purchase - EEs
10 - 8
Intercompany Bonds
Cost and Partial Equity Methods
Beginning retained earnings- P 10,000
Investment in S Bonds 10,000
(1) To recognize the constructive loss not recorded by S and
(2) adjust the intercompany bonds to par value
Beginning retained earnings- P 9,600
Beginning retained earnings- S 2,400
Discount on bonds payable 12,000
(1) To record last years constructive loss not recorded by P and
(2) adjust the intercompany bond investment to par value
Year After Intercompany Bond Purchase - EEs
10 - 9
Intercompany Bonds
Cost and Partial Equity Methods
Investment in S Bonds 2,500
Interest revenue 2,500
To reverse amortization of discount recorded by S in the current year
Discount on bonds payable 3,000
Interest expense 3,000
To reverse amortization of premium recorded by P in the current year
Year After Intercompany Bond Purchase - EEs
10 - 10
Intercompany Bonds
Cost and Partial Equity Methods
Year After Intercompany Bond Purchase - EEs
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
10 - 11
Intercompany Bonds
Complete Equity Method
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 years constructive loss not recorded by
P or S and
(2) adjust the intercompany bond investment to par value
Year After Intercompany Bond Purchase - EEs
10 - 12
Intercompany Bonds
Complete Equity Method
Investment in S Bonds 2,500
Interest revenue 2,500
To reverse amortization of discount recorded by S in the current year
Discount on bonds payable 3,000
Interest expense 3,000
To reverse amortization of premium recorded by P in the current year
Year After Intercompany Bond Purchase - EEs
10 - 13
Intercompany Bonds
Complete Equity Method
Year After Intercompany Bond Purchase - EEs
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
10 - 14
Consolidated NI-Year after Bond Purchase
Reported income of P
Constructive loss recorded by P
in the current year (premium
amortization)
Reported NI of S
+ Constructive loss recorded
by S in the current year
(discount amortization)

Consolidated net income
Intercompany Bonds
Dividend income
Ps contribution to combined income
Adjusted NI of S x P%
10 - 15
Consolidated Retained Earnings
Ending Reported R/E of P
Increase in S R/E
since acquisition
Consolidated R/E
Upstream Sales - Equipment
Cost and Partial Equity Methods
Constructive loss NOT
recorded by P
Increase in R/E of S
- Constructive loss NOT
recorded by S
x P%
10 - 16
Notes Receivable Discounted

Parent
Company

Subsidiary
Issues
$100,000 note
Discount
note with
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
10 - 17
Notes Receivable Discounted

Parent
Company

Subsidiary
Issues
$100,000 note
Discount
note with
bank
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
Receives note
from third
party
10 - 18
Stock Dividend from Subsidiary
Journal Entries

Stock dividend declared (or R/E) 150,000
Capital stock 150,000
Subsidiary
Parent
Memorandum entry only.
10 - 19
Stock Dividend from Subsidiary
Eliminating Entries
Capital stock 150,000
Stock dividend declared (or R/E) 150,000
Year of stock dividend
To reverse the subsidiarys JE on stock dividend
10 - 20
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
10 - 21
Subsidiary with Preferred Stock
Preferred stock
held
by parent
Preferred stock
not held
by parent
Common stock
not held
by parent
Common stock
held
by parent
Noncontrolling
interest
Controlling
interest
10 - 22
Controlling Interest in Net Income
Reported income of P
Other adjustments
Adjusted NI of S assigned to preferred stock x (Ps prefered stock %)
+ Adjusted NI of S assigned to common stock x (Ps common stock %)
Consolidated net income
Subsidiary with Preferred Stock
Dividend income
Ps contribution to combined income
Ps share of S adjusted income
10 - 23

Advanced Accounting
by
Debra Jeter and Paul Chaney


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