chapter 5 intercompany debt. c52 intercompany debt uintercompany loans are eliminated with interest...

Chapter 5

Intercompany Debt

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Intercompany debt

Intercompany loans are eliminated with interest

Bonds held by affiliate are retired Capital lease debt is eliminated; asset

becomes an owned asset

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Simple intercompany loanParent loans sub $100,000 at 8% on July 1; annual interest

Parent Journal Entries 7/1Note Rec 100,000

Cash 100,00012/31Int Rec 4,000

Int Rev 4,000

Sub Journal Entries7/1Cash 100,000

Note Pay 100,00012/31Int Exp 4,000

Int Pay 4,000

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Simple intercompany loan (continued)

Worksheet Eliminations

LN1 Note Payable 100,000Int Payable 4,000

Note Rec 100,000Int Rec 4,000

LN2 Interest Revenue 4,000Interest Expense 4,000

No impact on income distribution schedule

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Intercompany bonds A subsidiary may have debt that is more expensive

than if it were issued by the parent. One member of the affiliated group (usually the

Subsidiary) has bonds outstanding that are held by outsiders - The other member (usually the parent) purchases the bonds from the outsiders.

We treat it as WS retirement with an ordinary gain or loss (no longer extraordinary).

The result is the same if the parent loans money to the subsidiary and the subsidiary retires the bonds.

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Bond example:FactsSub (80%) issues to third parties $100,000, 8 year, 10% (annual interest) bond on 1/1/1 for $102,400

premium amortization (straight line) = $300 per year Int Exp = $9,700 per year

Parent purchases the bonds from third party for $99,200 on 1/1/5 (4 remaining years)

discount amortization (straight-line) = $200 per year Int Rev = $10,200 per year

Consolidated statements: $99,200 was paid to retire bonds with a book value of $101,200. There is $2,000 gain on the date of purchase.

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Bond example:Journal entries years 1-4

Sub Journal Entries Year 1Cash 102,400

Bond Pay 100,000Premium 2,400

Years 1, 2, 3, & 4Int Exp 9,700Premium 300

Int Pay 10,000

Parent Journal Entries

No entries

Premium Balance 1/1/5 = $1,200

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Bond example:Carrying values

DateSub’sDebt

Parent’sAsset

1/1/1 102,40012/31/1 102,10012/31/2 101,80012/31/3 101,50012/31/4 101,200 99,20012/31/5 100,900 99,40012/31/6 100.600 99,60012/31/7 100,300 99,80012/31/8 100,000 100,000

Parent buys 1/1/5

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Bond example:Journal entries years 5-8

Sub Journal Entries Year 5

Int Exp 9,700Premium 300

Int Pay 10,000

Years 6, 7, & 8Int Exp 9,700Premium 300

Int Pay 10,000

Parent Journal Entries Year 5Bond invest 99,200

Cash 99,200Int Rec 10,000

Bond Invest 200Int Rev 10,200

Years 6, 7, & 8Int Rec 10,000

Bond Invest 200Int Rev 10,200

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Bond example:Eliminations 12/31/5

Trial Balances Eliminations Co P Co S Dr Cr Investment in bonds 99,400 B1 99,400

Int receivable 10,000 B2 10,000

Bonds payable (100,000) B1 100,000

Premium on BP (900) B1 900

Int payable (10,000) B2 10,000

Gain on Retirement B1 2,000

Interest expense 9,700 B1 9,700

Interest revenue (10,200) B1 10,200

RE - Co S xxxx

RE - Co P xxxx

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Proof of gain on 12/31/5:

Book value of debt 100,900

Investment balance 99,400 1,500

Interest revenue 10,200

Interest expense 9,700 500

Gain on 1/1/5 2,000

Bond example:Eliminations 12/31/5 (continued)

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Sub IDSInterest adj. (B1) 500 Int generated inc 34,000

Gain on retire 2,000Adjusted net inc

35,500

NCI % 20%

NCI share 7,100

Bond example:Sub IDS 12/31/5

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Trial Balances EliminationsCo P Co S Dr Cr

Investment in bonds 99,600 B1 99,600

Int receivable 10,000 B2 10,000

Bonds payable (100,000) B1 100,000

Premium on BP (600) B1 600

Int payable (10,000) B2 10,000

Interest expense 9,700 B1 9,700

Interest revenue (10,200) B1 10,200

RE - Co S xxxx B1 300

RE - Co P xxxx B1 1,200

Bond example:Eliminations 12/31/6

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Bond example:Eliminations 12/31/6 (continued)Proof of gain on 12/31/6:





Gain on 1/1/6 1,500

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Bond example:Sub IDS 12/31/6


Adjusted net inc 23,500

NCI % 20%

NCI 4,700

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Effective interest bonds

Need an amortization schedule to see it See worksheet 5-4 and supporting amortization tables

in text The “easy out” entry - eliminate bonds payable,

discount or premium on bonds, interest expense and interest revenue

Gain or loss at year end+ Gain or loss amortized= Gain or loss at start of year (RE adj or G/L)

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Effective interest bond example:FactsSub issues to third party a $100,000, 8 year, 10% bond on 1/1/1 for $102,400

100,000FV;10,000pmt; 102,400PV; 8n = 9.5574%

Parent purchases the bonds from outsiders for $99,200 on 1/1/5 (4 remaining years)

100,000FV; 10,000pmt; 99,200PV; 4n = 10.254%

Consolidated statements: $99,200 was paid to retire bonds with a book value of $101,200. There is a $2,000 gain

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Effective interest bond example:Amortization tables

Date Cash S Int S Amt S Bal. P Int P Amt P Bal

1/1/1 10,000 102,400

12/31/1 10,000 9,787 213 102,187

12/31/2 10,000 9,766 234 101,953

12/31/3 10,000 9,744 256 101,697

12/31/4 10,000 9,720 280 101,417 99,200

12/31/5 10,000 9,693 307 101,109 10,172 172 99,372

12/31/6 10,000 9,663 337 100,773 10,189 189 99,561

12/31/7 10,000 9,631 369 100,404 10,209 209 99,770

12/31/8 10,000 9,596 404 100,000 10,230 230 100,000

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Trial Balances Eliminations

Co P Co S Dr Cr Invest -Bonds 99,561 B1 99,561 Int Rec 10,000 B2 10,000 Bonds Pay (100,000) B1 100,000 Premium on BP (773) B1 773 Int Pay (10,000) B2 10,000 Int Rev (10,189) B1 10,189 Int Exp 9,663 B1 9,663 RE - P xxxx B1 1,390 RE - S xxxx B1 348

Effective interest bond example:Eliminations 12/31/6

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Proof of gain on 12/31/6:





Gain on 1/1/6 1,738

Effective interest bond example:Eliminations 12/31/6 (continued)

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Adjusted net inc 23,474

NCI % 20%

NCI 4,695

Effective interest bond example:Sub IDS 12/31/6

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Intercompany Leases

Operating lease– just eliminate rental expense and revenue

– no adjustment to consolidated net income

Financing type (capital) lease– asset is on lessor’s books at cost

– similar to intercompany loan

– trick is that Lessee has Capt Lease Obligation (at PV) while Lessor has Min LP Rec (at gross) less Unearned Interest (brings gross amount down to PV)

– no adjustment to consolidated net income

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Intercompany leases (continued)

Sales type lease– recorded same as financing type lease

– there is a profit for the lessor, it is deferred in the same manner as the gain on a fixed asset sale.

Residual values– chapter assumes there is a bargain purchase option or

guaranteed residual which means the residual value is included in the minimum lease payments

– appendix considers unquaranteed residual: interest expense and revenue are not equal. In this case, there is an impact on consolidated net income.

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Financing-type lease example:Data Sub is 80% owned by Parent Cost of equipment leased is $21,682 Implicit rate is 12% for both parties Origination date is 1/1/1 Terms:

– start-of-period payments = $6,000– 4 years– bargain purchase option = $2,000

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Date Pmt Int Prin Bal1/1/1 6,000 6,000 15,6821/1/2 6,000 1,882 4,118 11,5641/1/3 6,000 1,388 4,612 6,9521/1/4 6,000 834 5,166 1,78612/31/4 2,000 214 1,786 0

Financing-type lease example:Amortization schedule

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Financing-type lease example:Journal entries year 1

Sub/Lessee Journal Entries 1/1/1Leased Asset 21,682

Lease Oblig 15,682Cash 6,000

12/31/1Int Exp 1,882

Int Pay 1,882

Parent/Lessor Journal Entries 1/1/1Min LP Rec 26,000

Unearn Int 4,318Cash 21,682

Cash 6,000Min LP Rec 6,000

12/31/1Unearned Int 1,882

Int Rev 1,882

Unearned interest = $2,436

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Trial Balances EliminationsCo P Co S Dr Cr

Min LP Rec 20,000 CL2 20,000Unearned Int (2,436) CL2 2,436Int Inc (1,882) CL1 1,882Oblig - CL (15,682) CL215,682Acc Int Pay (1,882) CL2 1,882Int Exp 1,882 CL1 1,882

Financing-type lease example:Eliminations 12/31/1

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Sub/Lessee Journal Entries 1/1/2Int Pay 1,882Lease Oblig 4,118

Cash 6,000

12/31/1Int Exp 1,388

Int Pay 1,388

Parent/Lessor Journal Entries 1/1/1Cash 6,000

Min LP Rec 6,000

12/31/1Unearned Int 1,388

Int Rev 1,388

Unearned interest = $1,048

Financing-type lease example:Journal entries year 2

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Trial Balances Eliminations Co P Co S Dr Cr

Min LP Rec 14,000 CL214,000Unearned Int (1,048) CL2 1,048Int Inc (1,388) CL1 1,388Oblig - CL (11,564) CL211,564Acc Int Pay (1,388) CL2 1,388Int Exp 1,388 CL1 1,388

Financing-type lease example:Eliminations 12/31/2

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Sales Type Leases

First - eliminate the lease

Then - the asset is overstated

Procedure (like any other fixed asset profit):reduce asset to costreduce accumulated depreciation and

correct RE for prior years depreciationreduce current year depreciation

chapter 5 intercompany debt. c52 intercompany debt uintercompany loans are eliminated with interest...

Documents

int exp9

int rec10

int rec4

int payable4

int pay4

int rev4

year int exp

bond invest200 int rev10