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Chapter 7 Test Bank

INTERCOMPANY PROFIT TRANSACTIONS BONDS

Multiple Choi e !uestions

"O##$ The inter o%pan& pur hase o' the parent o%pan& (on)s (& a

su(si)iar& has the sa%e e''e t on the onsoli)ate) 'inan ialstate%ents as the

a$ pur hase o' the (on)s (& a non*a''iliate$($ parent+s retire%ent o' the (on)s usin, 'un)s 'ro% ne-l&

issue) o%%on sto k$$ parent+s retire%ent o' the (on)s usin, 'un)s 'ro% a

su(si)iar& loan$)$ parent+s retire%ent o' the (on)s usin, 'un)s 'ro% the sale

o' ne- (on)s to non*a''iliates$

"O#.$ I' an a''iliate pur hases (on)s in the open %arket/ the

inter o%pan& (on) lia(ilit& (ook 0alue is

a$ al-a&s assi,ne) to the parent o%pan& (e ause it hasontrol$

($ the par 0alue o' the (on)s less the )is ount or plus thepre%iu% an) issuan e osts at the ti%e o' issuan e$

$ par 0alue$

)$ the par 0alue o' the (on)s plus una%orti1e) )is ount$

"O.2$ Material onstru ti0e ,ains an) losses 'ro% inter o%pan& (on)

hol)in,s are

a$ reali1e) ,ains an) losses 'ro% the issuin, a''iliate3sperspe ti0e$

($ al-a&s assi,ne) to the parent o%pan& (e ause it hasontrol$

$ reali1e) an) re o,ni1e) 'ro% the onsoli)ate) entit&3sperspe ti0e$

)$ e4 lu)e) 'ro% the onsoli)ate) in o%e state%ent until theperio) in -hi h the& (e o%e reali1e)$

5.66 Pearson E)u ation/ In $ pu(lishin, as Prenti e 8all7*#

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9se the 'ollo-in, in'or%ation in ans-erin, :uestions ; an) interest in ?li)er Co%pan&$ On@anuar& #/ .66 / Australian O-l ha) 66/666/ => (on)s outstan)in,-ith an una%orti1e) pre%iu% o' /666$ The (on)s %ature on De e%(er2#/ .6#6$ ?li)er a :uire) one*thir) o' Australian O-l3s (on)s in theopen %arket 'or # =/666 on @anuar& #/ .66 $ On De e%(er 2#/ .66 /the (ooks o' the t-o a''iliates hel) the 'ollo-in, (alan es

Australian O-l3s (ooks=> (on)s pa&a(le 66/666Pre%iu% on (on)s 7/.66Interest e4pense ; /.66

?li)er3s (ooksIn0est%ent in Australian O-l (on)s # =/;66Interest in o%e # /;66

"O.;$ The ,ain 'ro% the (on) pur hase that appeare) on the De e%(er

2#/ .66 onsoli)ate) in o%e state%ent -as

a$ 6$($ ;/;66$

$ ;/=66$)$

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"O.$ in,'isher Corporation o-ns =6> the 0otin, sto k o' Tunnel

Corporation$ On @anuar& #/ .66 / in,'isher pai) 2 #/666 ash'or ;66/666 par o' Tunnel3s #6> #/666/666 par 0alueoutstan)in, (on)s/ )ue on April #/ .6##$ Tunnel3s (on)s ha) a(ook 0alue o' #/6;*o-ne) su(si)iar& o' Ru'ous$ On @anuar& #/.66 / Bir) Corporation pur hase) # 6/666 par 0alue o' Ru'ous3soutstan)in, (on)s 'or #

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"O.$ Bon)s Pa&a(le appeare) in the De e%(er 2#/ .66 onsoli)ate)

(alan e sheet o' Ru'ous O-l Corporation an) Su(si)iar& in thea%ount o'

a$ .;/666$($ .=/666$

$ 26/;66$)$ 27/=66$

9se the 'ollo-in, in'or%ation 'or :uestions #6 throu,h #*o-ne) su(si)iar& o' Dollar(ir)/ pur hase) 2/666

o' the (on)s on the open %arket at #6#$

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"O.#.$ I' the (on)s -ere ori,inall& issue) at #62/ an) 76> o' the%

-ere pur hase) on @anuar& #/ .66= at #6;/ the onstru ti0e ,ainor GlossH on the pur hase -as

a$ G## /666H$

($ G2

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"O2#7$ Constru ti0e ,ains or losses are allo ate) (et-een pur hasin,

an) issuin, a''iliates a or)in, to

a$ the a,en & theor&$($ the par 0alue theor&$

$ either the a,en & theor& or the par 0alue theor&$)$ neither the a,en & theor& nor the par 0alue theor&$

"O2#=$ No allo ation o' ,ain or loss on the onstru ti0e retire%ent o'

inter o%pan& (on)s -ill o ur

a$ -hen the su(si)iar& is the issuin, a''iliate$($ -hen the e''e ti0e interest rate %etho) is applie)$

$ in the onsoli)ate) in o%e state%ent$)$ -hen the parent o%pan& is the issuin, a''iliate$

9se the 'ollo-in, in'or%ation in ans-erin, :uestions # an) .6$

Mistletoe(ir) Corporation o-ns an =6> interest in Berries Co%pan&a :uire) at (ook 0alue se0eral &ears a,o$ On @anuar& #/ .66 / Berriespur hase) #66/666 par o' Mistletoe(ir)3s outstan)in, (on)s 'or

#62/666$ The (on)s -ere issue) at par an) %ature on @anuar& #/ .66 $Strai,ht*line a%orti1ation is use)$ Separate in o%es o' Mistletoe(ir)an) Berries 'or .66 are 2

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"O#E4er ise #

Separate o%pan& an) onsoli)ate) in o%e state%ents 'or Pitta an) Ne-?uinea Corporations 'or the &ear en)e) De e%(er 2#/ .66 aresu%%ari1e) as 'ollo-s

Pitta Ne-?uinea

Consoli*)ate)

Sales Re0enue

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"O#E4er ise .

@a k& inter Corporation o-ns a 6> interest in Park Co%pan&$ The'ollo-in, in'or%ation is 'ro% the a)Juste) trial (alan es at De e%(er2#/ .66

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2$ On @anuar& ./ .66 / Rural pai) #6/=66 'or #6/666 par 0alue o'Pheasant3s #6*&ear/ #6> (on)s$ These (on)s ha0e interest pa&%ent)ates o' @anuar& # an) @ul& #/ an) %ature on @anuar& #/ .6#6$Strai,ht*line a%orti1ation has (een applie) (& Rural to thePheasant (on) in0est%ent$

;$ Pheasant uses the e:uit& %etho) in a ountin, 'or its in0est%entin Rural$

Re:uire)

Co%plete the -orkin, papers to onsoli)ate the 'inan ial state%entso' Pheasant Corporation an) Rural 'or the &ear en)e) De e%(er 2#/.66 $

5.66 Pearson E)u ation/ In $ pu(lishin, as Prenti e 8all7*

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Pheasant Corporation an) Su(si)iar&Consoli)ation orkin, Papers

at De e%(er 2#/ .66

Pheasant RuralEli%inations Balan e

SheetDe(it Cre)itINCOME STATEMENTSales

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"O.

E4er ise ;

De e%(er 2#/ .66 (alan e sheets 'or ren Corporation/ an) S hru(

Corporation/ its 6>*o-ne) su(si)iar&/ are presente) in the 'irst t-oolu%ns o' partiall& o%plete) (alan e sheet -orkin, papers$ ren

pai) # 6/666 'or its 6> interest in S hru( on @anuar& #/ .662 -henS hru( ha) #

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ren Corporation an) Su(si)iar&Consoli)ate) Balan e Sheet orkin, Papers

at De e%(er 2#/ .66

ren S hru(Eli%inations Non*

Cntl$Consol*i)ate)De(it Cre)it

BA"ANCE S8EETCash

2 /#66

26/666

Re ei0a(les =6/666 7

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"O.E4er ise interest in eran)a Corporation$ AtDe e%(er 2#/ .66

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"O. L 2E4er ise 7

Caterpillar In $ is an =6>*o-ne) su(si)iar& o' Bell(ir) Corp$ On@anuar& #/ .66(on)s at ; per (on)$ Interest is pai) on @anuar& # an) @ul& # o'

ea h &ear an) o0ers the pre e)in, si4 %onths$ On @ul& #/ .66 /Bell(ir) pur hase) all 66 (on)s on the open %arket 'or #/626 per(on)$ The 'ollo-in, ta(le sho-s sele te) a%ounts o' a%orti1ation onthe (on)s

A%orti1ation Ta(le 'or the Bon) Dis ount

Date Re%ainin, Balan e 6#*6#*6< .#/ 66 #.*2#*6< #;/;66 67*6#*6 #6/=66 #.*2#*6 7/.66

#.*2#*67 6

Re:uire) ith respe t to the (on)s/ use ?eneral @ournal 'or%at to

#$ Re or) the .66 Journal entries 'ro% @ul& # to De e%(er 2# onCaterpillar3s (ooks$

.$ Re or) the .66 Journal entries 'ro% @ul& # to De e%(er 2# onBell(ir)3s (ooks$

2$ Re or) the eli%ination entries 'or the onsoli)ation -orkin,papers at De e%(er 2#/ .66 $

5.66 Pearson E)u ation/ In $ pu(lishin, as Prenti e 8all7*#;

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"O.L2E4er ise =

Thorn(ill Corporation o-ns 6> o' the outstan)in, 0otin, o%%on sto ko' 8an,out Corporation$ On @anuar& #/ # =/ 8an,out issue) #/666/666'a e a%ount o' #.>/ #/666 (on)s pa&a(le at ## $.6$ The (on)s pa&

interest on @anuar& # an) @ul& # o' ea h &ear an) %ature on 'or on@anuar& #/ .66 $ On @ul& #/ .66 / Thorn(ill pur hase) all o' theoutstan)in, (on)s at a pri e o' #67$

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"O;E4er ise #6

ill& a,tail Co%pan& has ;/666/666 o' #.> (on)s outstan)in, onDe e%(er 2#/ .66; -ith una%orti1e) pre%iu% o' #.6/666$ These (on)spa& interest se%iannuall& on @anuar& # an) @ul& # an) %ature on

@anuar& #/ .6#6$ Strai,ht*line a%orti1ation is use)$ ?ar)en In $/ =6>*o-ne) su(si)iar& o' ill& a,tail/ (u&s #/666/666par 0alue o' ill& a,tail3s outstan)in, (on)s in the %arket 'or

=6/666$ There is onl& one issue o' outstan)in, (on)s o' thea''iliate) o%panies an) the& ha0e onsoli)ate) 'inan ial state%ents$ For the &ear .66

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SO"9TIONS

Multiple Choi e !uestions

#

. (

2

; ) Book 0alue o' Australian O-l3s(on)s a :uire) (& ?li)er e:uals#K2 ti%es G 66/666 /666H .62/666"ess Cost o' a :uirin,Australian O-l (on)s # =/666Constru ti0e ,ain on AustralianO-l (on)s

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= Full interest 'or #. %onthsE:uals .6/666 4 #6> ./666"ess interest on .26/666 'or %onths .26/666 4 #6> 4 7 #7/.E:uals (ook 0alue a :uire) ;/6 /666Pur hase pri e ;/666 (on)s 4

=62/ .6/666

?ain on onstru ti0e retire%ent #7 /666

#. a Book 0alue at @anuar& #/ .66=e:uals

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Interest a rue) on De e%(er 2#/.667 -ill (e the interest on(on)s hel) (& non*a''iliates or

./666/666 4 #.> 4 &ear #.6/666

#< (

# (

#7

#= )

# ( Mistletoe(ir)3s separate in o%e 2

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E4er ise #

#$ Pitta is the issuin, a''iliate$

.$ E''e t on onsoli)ate) net in o%e?ain on onstru ti0e retire%ent o' (on)s 2/666

"ess Pie e%eal re o,nition o' ,ain G /666interest in o%e * G 7/

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E4er ise .

.66 De(it Cre)it#.K2# Bon) Interest Pa&a(le #6/666

Bon) Interest Re ei0a(le #6/666

#.K2# Bon)s Pa&a(le .66/666Interest Re0enue .#/666Bon) pre%iu% =/666 Interest E4pense G o-ne)H #=/666 In0est%ent in Park3s Bon)s # /666 ?ain on (on)s #

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BA"ANCE S8EETCash =/666 #/;66 /;66Interest Re

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E4er ise ;

ren Corporation an) Su(si)iar&Consoli)ate) Balan e Sheet orkin, Papers

at De e%(er 2#/ .66

ren S hru(Eli%inations Non*

ntlConsol*i)ate)De(it Cre)it

BA"ANCE S8EETCash

2 /#66

26/666 /#66

Re ei0a(les =6/666 7

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Supportin, o%putations

Book 0alue o' (on)sG #6./666 4 H H ./# 6Minorit& share G ./;66 4 #6>H .;6

E4 ess allo ate) to plantassets .

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; &ears re%ainin,Pre%iu% on Bon) Pa&a(le 6/666 4 2K; 4 ;6> #=/666

Interest E4pense #/.66/666 4 #.> #;;/666"ess 6/666 4 #K; 4 ;6> /666 #2=/666

Interest Re0enue#;;/666 * G / 66 4 #K;H #;#/ 66

E4er ise

Date.66 A ount Na%e De(it Cre)it

?i((er(ir)3s (ooks@ul 6# In0est%ent in Ro k Bon)s ; 2/

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E4er ise 7

Date.66 A ount Na%e De(it Cre)it

Bell(ir)3s (ooks@ul 6# In0est%ent in Caterpillar Bon)s #=/666

Cash #=/666

De 2# Bon) Interest Re ei0a(le #=/666 Bon) Interest Re0enue #;/;66 In0est%ent in Caterpillar Bon)s 2/ 66

Caterpillar3s (ooksDe 2# Bon) Interest E4pense .#/ 66

Bon) Interest Pa&a(le #=/666 Dis ount on Bon)s Pa&a(le 2/ 66

Consoli)ate) orkin, PapersDe 2# Bon) Interest Pa&a(le #=/666 Bon) Interest Re ei0a(le #=/666

De 2# Bon)s Pa&a(le 66/666"oss on Bon)s .=/=66Bon) Interest Re0enue #;/;66 Bon) Interest E4pense .6/ 66 Dis ount on Bon)s Pa&a(le 7/.66 In0est%ent in Caterpilllar Bon)s #;/;66

GBook 0alue o' (on)s

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E4er ise =

Re:uire%ent #

The purpose o' the In0est%ent in 8an,out Bon)s a ount on thea :uirer3s (ooks an) the Bon)s Pa&a(le/ Dis ount on Bon)sPa&a(leKPre%iu% on Bon)s Pa&a(le a ounts on the issuer3s (ooks issi%ilar in that ea h set o' a ounts is tra kin, the net (ook 0alueo' the (on)s$ Sin e -e kno- that at the %aturit& )ate the net (ook0alue o' the (ooks %ust (e e:ual to the 'a e a%ount o' the (on)s(ein, re)ee%e)/ then no %atter -hat a%ounts are initiall& pla e) intothese a ounts/ the (alan e on the %aturit& )ate is e:ual to the%aturit& 0alue o' the (on)s$ There'ore/ (oth sets o' a ounts are%o0in, to-ar) the sa%e 'inal nu%(er$ In this pro(le%/ the ori,inalpre%iu% on the (on)s is a total o' # ./666 -hi h is # . per (on)$Sin e the (on)s ha0e an ei,ht*&ear or *%onth ter%/ the rate o'

a%orti1ation is . per %onth per (on) or ./666 per %onth in total$hen Thorn(ill a :uires the (on)s it pa&s a pre%iu% o' 7

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E4er ise

Preli%inar& o%putationsBook 0alue o' (on)s 26/666 4 #K2 2#6/666Cost o' (on)s 2#7/666"oss on onstru ti0e retire%ent 7/666

Re:uire%ent #In o%e 'ro% aterholeShare o' aterhole3s in o%e G 266/666 4

6>H#=6/666

"ess Constru ti0e loss G 7/666 4 6>H G ;/.66 HPlus Pie e%eal re o,nition o' loss G 7/666K< &earsH 4 6> =;6In o%e 'ro% aterhole #7 / ;6

Re:uire%ent .Minorit& interest in o%e

aterhole3s reporte) in o%e 266/666"ess Constru ti0e loss on (on)s G 7/666 HPlus Pie e%eal re o,nition o' loss #/;66E:uals A)Juste) reporte) in o%e . ;/;66Minorit& per enta,e ;6>

Minorit& interest in o%e ##7/7 6

5.66 Pearson E)u ation/ In $ pu(lishin, as Prenti e 8all7*.=

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E4er ise #6

Re:uire%ent #Minorit& interest in o%e 66/666 4 .6> #.6/666

Re:uire%ent .Consoli)ate) net in o%eIn o%e 'ro% ill& a,tail3s operations ;/ 4 66/666 ;=6/666

A)) Constru ti0e ,ain on (on)retire%ent G ;/666/666 #.6/666HQ.*

=6/666 4 66/666 G #.6/666 HConsoli)ate) net in o%e ;/= 7/