cutler company owns 80 percent of the common stock of marina inc.

 Chapter 08 Intercompany Indebtedness Answer Key
 

  


Multiple Choice Questions
 
1. Cutler Company owns 80 percent of the common stock of Marina Inc. Cutler acquires some of Marina’s bonds from an unrelated party for less than the carrying value on Marina’s books and holds them as a long-term investment. For consolidated reporting purposes, how is the 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 nothing related 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 purchases some 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 nothing related 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 from unaffiliated parties at a cost less than the subsidiary’s carrying value. The consolidated net income 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, and decreased by the subsidiary’s bond interest expense.
D. the subsidiary’s net income decreased by the gain on constructive retirement of debt, and decreased by the subsidiary’s bond interest expense.

  

4. A loss on the constructive retirement of a parent’s bonds by a subsidiary is effectively recognized 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. I
B. II
C. Both I and II
D. Neither I nor II

 

 

5. When one company purchases the debt of an affiliate from an unrelated party, a gain or loss on the constructive retirement of debt is recognized by which of the following?
   
A. Option A
B. Option B
C. Option C
D. Option D

 

6. Which of the following statements is (are) correct?
I. The amount assigned to the noncontrolling interest may be affected by a constructive retirement 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 are treated as if they were retired in preparing consolidated financial statements. 
A. I
B. II
C. I and III
D. I, II, and III

 
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 of amortization. The consolidated income statement for the year 20X9 should report with respect to the bonds:
I. interest expense of $30,000.
II. an extraordinary gain of $6,000. 
A. I
B. II
C. Either I or II
D. Neither I nor II

  

 Light 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 of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual 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 reported in the 20X8 consolidated income statement? 
A. $6,000
B. $6,500
C. $5,000
D. $10,000

 9. Based on the information given above, what amount of interest receivable will be recorded by Light Corporation on December 31, 20X8, in its separate financial statements? 
A. $5,000
B. $6,500
C. $10,000
D. $6,000

  

10. Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X8 consolidated financial statements? 
A. $13,000
B. $13,500
C. $10,000
D. $15,000

 

 

 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 consolidated financial 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 consolidated financial 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 be eliminated in the preparation of the 20X8 consolidated financial statements? 
A. $240,500
B. $200,000
C. $245,000
D. $211,500

 

 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 of Moon bonds from Star. The bonds pay 12 percent interest annually on December 31. The preparation of consolidated financial statements for Moon and Sun at December 31, 20X9, required the following eliminating entry:
  

 

14. Based on the information given above, what percentage of the subsidiary’s ownership does the parent company hold? 
A. 75 percent
B. 65 percent
C. 80 percent
D. 95 percent

 

15. Based on the information given above, what amount did Sun pay when it purchased the bonds on July 1, 20X7? 
A. $118,020
B. $118,920
C. $118,620
D. $117,220

 

16. Based on the information given above, what amount of gain or loss on bond retirement is included in the 20X7 consolidated income statement? 
A. $6,600
B. $4,800
C. $6,000
D. $5,400

 

17. Based on the information given above, if 20X9 consolidated net income of $50,000 would have been reported without the eliminating entry provided, what amount will actually be reported? 
A. $47,900
B. $48,200
C. $49,400
D. $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 of DEF, had a $450,000 carrying amount for this bond.

 

18. Based on the information given above, what amount of gain or loss on bond retirement was recorded? 
A. No gain or loss
B. $85,000 gain
C. $85,000 loss
D. $35,000 loss

 

19. Based on the information given above, what was the effect of DEF’s purchase of XYZ’s bond on the noncontrolling interest amount reported in XYZ’s June 30, 20X8, consolidated balance sheet? 
A. No effect
B. $35,000 increase
C. $8,500 decrease
D. $8,500 increase

 .
 

 Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. 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 on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite’s voting common stock.

 

20. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X8 consolidated financial statements? 
A. $3,500
B. $2,800
C. $5,000
D. $2,500

 21. Based on the information given above, what amount of gain or loss on bond retirement will be reported in the 20X8 consolidated financial statements? 
A. $17,000 loss
B. $12,800 loss
C. $18,500 gain
D. $22,200 gain

  

22. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X9 consolidated financial statements? 
A. $3,500
B. $2,800
C. $5,000
D. $2,500

 

 

23. Based on the information given above, what amount of interest income will be eliminated in the preparation of the 20X9 consolidated financial statements? 
A. $17,000
B. $13,300
C. $18,500
D. $22,200

 24. Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X9 consolidated financial statements? 
A. $17,000
B. $13,300
C. $18,500
D. $22,200

 


AACSB: Analytic
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 08-03 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount less than book value.
 

25. Based on the information given above, what amount of constructive gain will be allocated to noncontrolling interest in 20X8 consolidated financial statements? 
A. $4,925
B. $5,550
C. $5,625
D. $4,625

 


AACSB: Analytic
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 08-03 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount less than book value.
 

 Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. 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 on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite’s voting common stock.

 

26. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X8 year-end consolidated financial statements? 
A. $3,500
B. $2,800
C. $5,000
D. $2,500
 

27. Based on the information given above, what amount of gain or loss on bond retirement will be reported in the 20X8 consolidated financial statements? 
A. $17,000
B. $12,800
C. $18,500
D. $22,200

 

 

28. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X9 year-end consolidated financial statements? 
A. $3,500
B. $2,800
C. $5,000
D. $2,500

 

29. Based on the information given above, what amount of interest income will be eliminated in the preparation of the 20X9 consolidated financial statements? 
A. $17,000
B. $13,300
C. $18,500
D. $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 from Cruse 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 net income of $65,000 for 20X8, and Hunter reported income (excluding income from ownership of Moss’s stock) of $90,000.

 

30. Based on the information given above, what amount of interest expense does Hunter record annually? 
A. $10,750
B. $9,500
C. $2,500
D. $12,000

 

31. Based on the information given above, what amount of interest income does Moss record for 20X8? 
A. $12,000
B. $2,500
C. $7,500
D. $9,500

  

32. Based on the information given above, what gain or loss on the retirement of bonds should be reported in the 20X8 consolidated income statement? 
A. $6,250 gain
B. $7,500 gain
C. $7,500 loss
D. $6,250 loss

  

33. Based on the information given above, what amount of consolidated net income should be reported for 20X8? 
A. $163,750
B. $161,250
C. $146,250
D. $148,750

 

 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 percent Junior bonds, which had been issued on January 1, 20X5, with a 12-year maturity. During preparation of the consolidated financial statements for December 31, 20X8, the following eliminating entry was made in the worksheet:
  

 

34. Based on the information given above, what price did Senior pay to purchase the Junior bonds? 
A. $530,000
B. $516,875
C. $533,750
D. $550,625

 

35. Based on the information given above, what was the carrying amount of the bonds on Junior’s books on the date of purchase? 
A. $533,750
B. $516,875
C. $545,000
D. $550,625

 

 

 
  

Get 20% Discount on This Paper
Pages (550 words)
Approximate price: -

Try it now!

Get 20% Discount on This Paper

We'll send you the first draft for approval by at
Total price:
$0.00

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Our Services

Paper Helper has assembled a team of highly skilled writers with diverse experience in the online writing circles. Our aim is to become a one stop shop for all your Academic/ online writing. Check out below our amazing service!

Essays

Essay Writing Services

At Paper Helper, we prioritize on all aspects that creates a good grade such as impeccable grammar, proper structure, zero-plagiarism, and conformance to guidelines. The principal purpose of essay writing is to present the author's evaluation concerning a singular subject about which they have made. Since Professionalism is the mother of every success, try our team of experienced writers in helping you complete your essays and other assignments.

Admissions

Admission Papers

You have been trying to join that prestigious institution you long yearned for, but the hurdle of an admission essay has become a stumbling block. We have your back, with our proven team that has gained invaluable experience over time, your chance of joining that institution is now! Just let us work on that essay.How do you write an admission essay? How do you begin the essay? For answers, try Quality Custom Writers Now!

Editing

Editing and Proofreading

Regardless of whether you're pleased with your composing abilities, it's never an impractical notion to have a second eye go through your work. The best editing services leaves no mistake untouched. We recognize the stuff needed to polish up a writing; as a component of our editing and proofreading, we'll change and refine your write up to guarantee it's amazing, and blunder free. Our group of expert editors will examine your work, giving an impeccable touch of English while ensuring your punctuation and sentence structures are top-notch.

Coursework

Technical papers

We pride ourselves in having a team of clinical writers. The stringent and rigorous vetting process ensures that only the best persons for job. We hire qualified PhD and MA writers only. We equally offer our team of writers bonuses and incentives to motivate their working spirit in terms of delivering original, unique, and informative content. They are our resources drawn from diverse fields. Therefore your technical paper is in the right hands. Every paper is assessed and only the writers with the technical know-how in that field get to work on it.

Coursework

College Essay Writing

If all along you have been looking for a trustworthy college essay service provider that provides superb academic papers at reasonable prices, then be glad that you search has ended with us. We are your best choice! Get high-quality college essay writing from our magnificent team of knowledgeable and dedicated writers right now!

Coursework

Quality Assignment/Homework Help

We give the students premium quality assignments, without alarming them with plagiarism and referencing issues. We ensure that the assignments stick to the rules given by the tutors. We are specific about the deadlines you give us. We assure you that you will get your papers well in advance, knowing that you will review and return it if there are any changes, which should be incorporated.

togel macau togel terbesar bocoran admin jarwo data macau