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258 CHAPTER 7

Construct the consolidation workpaper entries necessary to eliminate reciprocal balances (a) assuming that
the parent acquired its intercompany bond investment at the beginning of the current year, and (b) assuming
that the parent acquired its intercompany bond investment two years prior to the date of the adjusted trial
balance.
9. How is the amount of piecemeal recognition of constructive gain or loss determined in the intercompany
bonds transaction?
10. How will the elimination of interest expense and interest income from intercompany bond transactions
affect the controlling share of the consolidated net income?
11. If a parent reports interest expense of $4,300 with respect to bonds held intercompany and the subsidiary
reports interest income of $4,500 for the same bonds: (a) Was there a constructive gain or loss on the bonds?
(b) Is the gain or loss attributed to the parent or the subsidiary? And (c) what does the $200 difference
between interest income and expense represent?

ExERcISES
E 7-1
General questions
1. Which of the following is not a characteristic of a constructive retirement of bonds from an intercompany bond
transaction?
a Bonds are retired for consolidated statement purposes only.
b The reciprocal intercompany bond investment and liability amounts are eliminated in the consolidation
process.
c Any gain or loss from the intercompany bond transaction is recognized on the books of the issuer.
d For consolidated statement purposes, the gain or loss on the constructive retirement of bonds
is the difference between the book value of the bond liability and the purchase price of the bond
investment.
2. When bonds are purchased in the market by an affiliate, the book value of the intercompany bond liability is:
a The par value of the bonds less unamortized issuance costs and less unamortized discount or plus
unamortized premium.
b The par value of the bonds less issuance costs, less unamortized discount or plus unamortized premi-
ums, and less the costs incurred to purchase the bond investment.
c The par value of the bonds.
d The par value of the bonds less the discount or plus the premium at issuance.
3. Constructive gains and losses on bonds payable:
a Arise when one company purchases the bonds of an affiliate or lends money directly to the affiliate to
repurchase its own bonds
b Are realized gains and losses from the viewpoint of the issuer affiliate
c Are always assigned to the parent because its management makes the decisions for intercompany
transactions
d Are realized and recognized from the viewpoint of the consolidated entity
4. Straight-line interest amortization of bond premiums and discounts is used as an expedient in this book.
However, the effective interest rate method is generally required under GAAP. When using the effective interest rate
method:
a The amount of the piecemeal recognition of a constructive gain or loss is the difference between the
intercompany interest expense and income that is eliminated.
b The piecemeal recognition of a constructive gain or loss is recorded in the separate accounts of the
affiliates.
c No piecemeal recognition of the constructive gain or loss is required for consolidated statement
purposes.
d The issuing and the purchasing affiliates do not amortize the discounts and premiums on their separate
books because the bonds are retired.

E 7-2
General problems
Pang Corporation owns 80 percent interest in Sunda Corporation. On January 1, 2016, Sunda purchased $100,000 par
of Pang’s $1,000,000 outstanding bonds for $98,000 in the bond market. Pang’s bonds have a 10 percent interest rate,
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Intercompany Profit Transactions—Bonds 259

paid on January 1 and July 1, and mature on January 1, 2021. There was a $50,000 unamortized premium on the bond
issue on January 1, 2016. Assume straight-line amortization.
1. The constructive gains or loss that should appear in the consolidated income statement of Pang Corporation and
Subsidiary for 2016 is:
a $2,000 loss
b $7,000 gain
c $5,000 gain
d None of the above

2. Interest income that should appear in the 2016 consolidated income statement for Pang’s bond issue is:
a $14,000
b $10,400
c $10,000
d None of the above

E 7-3
Constructive gain/loss on purchase of subsidiary bonds
Abbey Corporation owns 90 percent of the voting common stock of Westminster Corporation. At December 31, 2016,
Westminster has $900,000 par of 8 percent bonds outstanding with an unamortized discount of $30,000. The bonds
pay interest on January 1 and July 1 of each year, and they mature in five years, on January 1, 2022. On January 2,
2017, Abbey Corporation purchases 50 percent of Westminster’s outstanding bonds for $460,000 in cash. Assume
straight-line amortization.

1. The amount of gain or loss that should be reported on Abbey Corporation and Subsidiary’s consolidated income
statement at December 31, 2017, is:
a $25,000 loss
b $25,000 gain
c $20,000 loss
d None of the above

2. The amount that Abbey Corporation should record as a piecemeal recognition of constructive gain or loss at
December 31, 2017, is:
a $5,000
b $4,500
c $5,500
d None of the above

3. Interest expense on Westminster bonds appears in the consolidated income for 2017 at:
a $34,000
b $39,000
c $30,000
d None of the above

4. Interest income on Westminster bonds appears in the consolidated income for 2017 at:
a $34,000
b $39,000
c $30,000
d None of the above

5. Consolidated net income for 2016 will be affected by the intercompany bond transactions as follows:
a Decreased by the constructive loss of $20,000
b Increased by the elimination of interest income of $34,000
c Increased by the elimination of interest expense of $39,000
d None of the above

E 7-4
Subsidiary purchases parent bonds
On January 1, 2014, Petr SA purchased half of Lenka SA’s outstanding 10 percent bond for $550,000 cash. Petr SA was
the 80 percent-owned subsidiary of Lenka SA with no book value/fair value difference. At that time, the outstanding
bonds had a par value of $1,000,000 with $200,000 unamortized discount. The bonds mature on January 1, 2019. At
the end of year 2014, Petr SA reported net income of $500,000.
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260 CHAPTER 7

REQuIRED
1. Calculate income from Petr SA for 2014.
2. Calculate noncontrolling interest share for 2014.

E 7-5
Consolidated income statement (purchase of parent’s bonds)
Comparative income statements for Laode Corporation and its 80 percent-owned subsidiary, Ucok Corporation, for 2017
are summarized as follows (in thousands):
Laode Ucok
Sales $2,000 $800
Income from Ucok 282.4 —
Bond interest income — 33
Cost of sales 1,250 400
Operating expenses 250 125
Bond interest expense 87 —
Net income $695.4 $308

Laode purchased its interest in Ucok on January 1, 2016, when the book value of Ucok’s net assets equaled fair
value. On January 2, 2017, Ucok purchased $300,000 of Laode’s $900,000 par of 10 percent, 10-year outstanding bonds
for $270,000 in the bond market. There is an unamortized premium of $30,000 on the bond issue. The company use
straight-line amortization.

R E Q u I R E D : Prepare a consolidated income statement for Laode Corporation and Subsidiary for the year
ended December 31, 2017.

E 7-6
Parent purchases subsidiary bonds
Albert NL was a 90 percent subsidiary of Josh NL, acquired when the book value of Albert NL net assets was equal to
its fair value. On January 1, 2014, Albert NL has 10 percent $2,000,000 par bonds with unamortized premium of
$200,000. The bonds will mature in 10 years. At this date, Josh NL purchased 20% of Albert NL’s bonds with price of
$450,000. The interest payment dates of the bonds are January 1 and July 1.

R E Q u I R E D : Determine the amount that should be presented on the consolidated financial statements for
the following accounts in 2014:
1. 10 percent bonds payable
2. Investment in Albert NL
3. Interest expense
4. Interest income

E 7-7
Parent purchases subsidiary bonds
Comparative balance sheets of Pam and Sun Corporations at December 31, 2016, follow:
Pam Sun
Assets
Accounts receivable—net $ 2,048,600 $  600,000
Interest receivable 20,000 —
Inventories 6,000,000 1,000,000
Other current assets 197,000 400,000
Plant assets—net 7,680,000 5,000,000
Investment in Sun stock 3,661,600 —
Investment in Sun bonds   392,800 —
Total assets $20,000,000 $7,000,000
Liabilities and Stockholders’ Equity
Accounts payable $  800,000 $   278,000
Interest payable — 100,000
10% bonds payable — 2,072,000
Capital stock 16,000,000 4,000,000
Retained earnings   3,200,000   550,000
Total equities $20,000,000 $7,000,000
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Intercompany Profit Transactions—Bonds 261

Pam acquired 80 percent of Sun’s capital stock for $3,320,000 on January 1, 2014, when Sun’s capital stock was
$4,000,000 and Sun’s retained earnings was $150,000.
On January 2, 2016, Pam acquired $400,000 par of Sun’s 10 percent bonds in the market for $391,000, on which
date the unamortized premium for bonds payable on Sun’s books was $90,000. The bonds pay interest on January 1
and July 1 and mature on January 1, 2021. (Assume straight-line amortization.)
1. The gain or loss on the constructive retirement of $400,000 of Sun bonds on January 2, 2016, is reported in the
consolidated income statement in the amount of:
a $27,000
b $23,000
c $21,000
d $14,000
2. The portion of the constructive gain or loss on Sun bonds that remains unrecognized on the separate books of Pam
and Sun at December 31, 2016, is:
a $24,000
b $21,600
c $21,000
d $18,400
3. Consolidated bonds payable at December 31, 2016, should be reported at:
a $2,072,000
b $2,000,000
c $1,657,600
d $1,600,000

E 7-8
Midyear purchase of subsidiary’s bonds
Sanur Corporation is a 90 percent subsidiary of Pare Corporation. On January 1, 2016, Sanur issued $1,000,000 par, 10
percent 5-year bonds with an unamortized premium of $50,000. On July 1, 2016, Pare Corporation purchased $400,000
par of the outstanding bonds of Sanur for $390,000. Straight-line amortization is used.

R E Q u I R E D : Calculate the following:

1. The gain or loss on constructive retirement of the bonds
2. The consolidated bond interest expense for 2016
3. The consolidated bond liability at December 31, 2016

E 7-9
Different assumptions for purchase of parent’s bonds and subsidiary’s bonds
The balance sheets of Pam and Sun Corporations, an 80 percent–owned subsidiary of Pam, at December 31, 2016, are
as follows (in thousands):

Pam Sun
Assets
Cash $ 2,440 $2,500
Accounts receivable—net 3,000 300
Other current assets 8,000 1,200
Plant assets—net 15,000 5,500
Investment in Sun  6,560 —
Total assets $35,000 $9,500
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262 CHAPTER 7

Pam Sun
Liabilities and Stockholders’ Equity
Accounts payable $ 750 $ 230
Interest payable 250 50
10% bonds payable (due January 1, 2022) 4,900 1,020
Capital stock 25,000 7,000
Retained earnings  4,100  1,200
 Total liabilities and stockholders’ equity $35,000 $9,500

The book value of Pam’s bonds reflects a $100,000 unamortized discount. The book value of Sun’s bonds reflects a
$20,000 unamortized premium.

REQuIRED
1. Assume that Sun purchases $2,000,000 par of Pam’s bonds for $1,900,000 on January 2, 2017, and that
semiannual interest is paid on July 1 and January 1. Determine the amounts at which the following items
should appear in the consolidated financial statements of Pam and Sun at and for the year ended December
31, 2017.
a. Gain or loss on bond retirement
b. Interest payable
c. Bonds payable at par value
d. Investment in Pam bonds
2. Disregard 1 above and assume that Pam purchases $1,000,000 par of Sun’s bonds for $1,030,000 on Janu-
ary 2, 2017, and that semiannual interest on the bonds is paid on July 1 and January 1. Determine the
amounts at which the following items will appear in the consolidated financial statements of Pam and Sun
for the year ended December 31, 2017.
a. Gain or loss on bond retirement
b. Interest expense (assume straight-line amortization)
c. Interest receivable
d. Bonds payable at book value

E 7-10
Parent purchases subsidiary bonds issued on par
Lana DD was the parent company of Noa DD, acquired in 2011. Lana DD owned 90 percent interest in Noa DD. On
January 1, 2013, Noa DD issued $800,000 par of 5 percent, 5-year bonds at par to the public. On January 1, 2014,
Lana DD purchased 20% of Noa DD’s outstanding bonds for $185,000. At the end of 2014, Noa DD reported net income
of $400,000.

REQuIRED
1. Calculate income from Noa DD for 2014.
2. Calculate noncontrolling interest share for 2014.
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Intercompany Profit Transactions—Bonds 263

E 7-11
Consolidated income statement (constructive retirement of all subsidiary bonds)
Comparative income statements for Pam Corporation and its 80 percent–owned subsidiary, Sun Corporation, for the
year ended December 31, 2017, are summarized as follows:

Pam Sun
Sales $1,200,000 $600,000
Income from Sun 260,800 —
Bond interest income (includes discount amortization) 91,000 —
Cost of sales (750,000) (200,000)
Operating expenses (200,000) (200,000)
Bond interest expense —  (60,000)
 Net income $ 601,800 $140,000

Pam purchased its 80 percent interest in Sun at book value on January 1, 2016, when Sun’s assets and liabilities
were equal to their fair values.
On January 1, 2017, Pam paid $783,000 to purchase all of Sun’s $1,000,000, 6 percent outstanding bonds. The
bonds were issued at par on January 1, 2015, pay interest semiannually on June 30 and December 31, and mature on
December 31, 2023.

R E Q u I R E D : Prepare a consolidated income statement for Pam Corporation and Subsidiary for the year ended
December 31, 2017.

E 7-12
Computations and entries (parent purchases subsidiary bonds)
Pop Corporation, which owns an 80 percent interest in Son Corporation, purchases $100,000 of Son’s 8 percent bonds
at 106 on July 2, 2016. The bonds pay interest on January 1 and July 1 and mature on July 1, 2019. Pop uses the equity
method for its investment in Son. Selected data from the December 31, 2016, adjusted trial balances of the two com-
panies are as follows:

Pop Son
Interest receivable $ 4,000 $—
Investment in Son 8% bonds 105,000 —
Interest payable — 40,000
8% bonds payable ($1,000,000 par) — 985,000
Interest income 3,000 —
Interest expense — 86,000
Gain or loss on retirement of intercompany bonds

REQuIRED
1. Determine the amounts for each of the foregoing items that will appear in the consolidated financial state-
ments on or for the year ended December 31, 2016.
2. Prepare in general journal form the workpaper adjustments and eliminations related to the foregoing bonds
that are required to consolidate the financial statements of Pop and Son Corporations for the year ended
December 31, 2016.
3. Prepare in general journal form the workpaper adjustments and eliminations related to the bonds that are
required to consolidate the financial statements of Pop and Son Corporations for the year ended December
31, 2017.

E 7-13
Computations and entries (constructive gain on purchase of parent bonds)
Pop Corporation acquired an 80 percent interest in Son Corporation at book value equal to fair value on January 1, 2017,
at which time Son’s capital stock and retained earnings were $200,000 and $80,000, respectively. On January 2, 2018,
Son purchased $100,000 par of Pop’s 8 percent, $200,000 par bonds for $97,600 three years before maturity. Interest
payment dates are January 1 and July 1. During 2018, Son reports interest income of $8,800 from the bonds, and Pop
reports interest expense of $16,000.
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264 CHAPTER 7

A D D I T I O N A L I N F O R M AT I O N
1. Pop’s separate income for 2018 is $400,000.
2. Son’s net income for 2018 is $100,000.
3. Pop accounts for its investment using the equity method.
4. Straight-line amortization is applicable.

REQuIRED
1. Determine the gain or loss on the bonds.
2. Prepare the journal entries for Son to account for its bond investment during 2018.
3. Prepare the journal entries for Pop to account for its bonds payable during 2018.
4. Prepare the journal entry for Pop to account for its 80 percent investment in Son for 2018.
5. Calculate noncontrolling interest share and consolidated net income for 2018.

pROBLEMS
P7-1
Journal entries (constructive retirement of subsidiary’s bonds)
Penang Corporation owns an 80 percent interest in Minang Corporation. On October 1, 2016, Minang
issued $100,000 par, 10 percent 3-year bonds with an unamortized discount of $20,000. On October 2,
2016, Penang purchased 50 percent of the outstanding bonds for $48,000. The bonds pay interest on April
1 and October 1, and are amortized using the straight-line method.

R E Q u I R E D : Prepare the consolidated adjustment journal entries for Penang Corporation and Subsidiary.

P7-2
Four-year income schedule (several intercompany transactions)
Intercompany transactions between Pop Corporation and Son Corporation, its 80 percent–owned subsidi-
ary, from January 2016, when Pop acquired its controlling interest, to December 31, 2019, are summa-
rized as follows:
2016 Pop sold inventory items that cost $30,000 to Son for $40,000. Son sold
$30,000 of these inventory items in 2016 and $10,000 of them in 2017.
2017 Pop sold inventory items that cost $15,000 to Son for $20,000. All of these
items were sold by Son during 2018.
2018 Son sold land with a book value of $20,000 to Pop at its fair market value of
$27,500. This land is to be used as a future plant site by Pop.
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Intercompany Profit Transactions—Bonds 265

2018 Pop sold equipment with a four-year remaining useful life to Son on January
1 for $40,000. This equipment had a book value of $25,000 at the time of
sale and was still in use by Son at December 31, 2019.
2019 Son purchased $50,000 par of Pop’s 10% bonds in the bond market for
$53,000 on January 2, 2019. These bonds had a book value of $49,000 when
acquired by Son and mature on January 1, 2023.

The separate income of Pop (excludes income from Son) and the reported net income of Son
for 2016 through 2019 were:
2016 2017 2018 2019
Separate income of Pop $250,000 $187,500 $230,000 $255,000
Net income of Son 50,000 60,000 55,000 60,000

R E Q u I R E D : Compute Pop’s net income (and the controlling share of consolidated net income) for each of
the years 2016 through 2019. A schedule with columns for each year is suggested as the most efficient approach
to solve this problem. (Use straight-line depreciation and amortization and take a full year’s depreciation on
the equipment sold to Son in 2018.)

P7-3
Subsidiary purchases parent bonds
The separate trial balance for Thanos SA and Merry SA, its 90 percent-owned subsidiary, for the year
ended 2014 is as follows:
Debits Thanos SA Merry SA
Cash $700 $600
Accounts receivable 1,000 400
Interest receivable 0 25
Inventory 1,100 700
Land 1,900 800
Equipment-net 1,100 1,400
Building-net 2,000 1,400
Investment in Thanos SA bonds 0 460
Investment in Merry SA 3,600 0
Cost of sales 2,800 2,400
Interest expense 100 0
Other expenses 1,100 700
Dividends 300 100
Total $15,700 $8,985
Credits
Accounts payable $1,300 $1,000
Interest payable 50 0
10% bonds payable 1,000 0
Common stock 5,000 2,000
Retained Earnings 3,380 2,085
Sales 4,800 3,700
Gain on sale of land 0 200
Gain on sale of equipment 100 0
Interest income 70 0
Total $15,700 $8,985
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266 CHAPTER 7

A D D I T I O N A L I N F O R M AT I O N
1. Thanos SA acquired Merry SA when the book value of its net identifiable assets equaled the fair value.
2. Intercompany merchandise sale during 2014 by Thanos SA to Merry SA was $800,000 while unrealized
profit of $100,000 remained in the ending inventory.
3. Thanos SA purchased land from Merry SA with book value of $800,000 for $1,000,000 in 2014. Thanos
SA holds the land until 2015.
4. Merry SA purchased equipment from Thanos SA for $700,000 on December 31, 2014. The gain from
selling this equipment was $100,000.
5. On January 1, 2014, Merry SA purchased half of Thanos SA’s 10 percent outstanding bonds that were
originally issued at par for $440,000. The bonds will mature on January 1, 2017. The bonds paid interest
every January 1 and July 1.

REQuIRED: Prepare consolidation workpapers for Thanos SA and subsidiary for the year ended
December 31, 2014.

P7-4
Computations of separate and consolidated statements given
Pop Corporation acquired an 80 percent interest in Son Corporation on January 1, 2016, for $640,000,
at which time Son had capital stock of $400,000 outstanding and retained earnings of $200,000. The price
paid reflected a $200,000 undervaluation of Son’s plant and equipment. The plant and equipment had a
remaining useful life of eight years when Pop acquired its interest.
Separate and consolidated financial statements for Pop and its subsidiary, Son Corporation, for
the year ended December 31, 2018, are as follows (in thousands):
Pop Son Consolidated
Combined Income and Retained Earnings Statement
for the Year Ended December 31, 2018
Sales $ 360 $200 $ 460
Income from Son 40 — —
Interest income — 16 —
Cost of goods sold (220) (120) (220)
Operating expenses (60) (36) (116)
Interest expense (36) — (18)
Loss — — (6)
Noncontrolling interest share — — (16)
Controlling share of net income   84   60 84
Add: Beginning retained earnings 588 270 588
Deduct: Dividends  (40)  (30)  (40)
Ending retained earnings $ 632 $300 $ 632
Balance Sheet at December 31, 2018
Cash $ 120 $ 52 $ 172
Accounts receivable 240 120 330
Inventories 200 100 280
Plant and equipment 1,000 400 1,560
Accumulated depreciation (200) (100) (360)
Investment in Son stock 640 — —
Investment in Pop bonds — 208 —
Total assets $2,000 $780 $1,982
Accounts payable $ 160 $ 80 $ 210
10% bonds payable 408 — 204
Common stock 800 400 800
Retained earnings 632 300 632
Noncontrolling interest — — 136
Total equities $2,000 $780 $1,982
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Intercompany Profit Transactions—Bonds 267

Son sells merchandise to Pop but never purchases inventory from Pop. On January 1, 2018, Son
purchased $200,000 par of 10 percent Pop Corporation bonds for $212,000. These bonds mature on
December 31, 2020, and Son expects to hold the bonds until maturity. Both Son and Pop use straight-
line amortization. Interest is payable on December 31.

R E Q u I R E D : Show computations for each of the following items:

1. The $6,000 loss in the consolidated income statement
2. The $460,000 consolidated sales
3. Consolidated cost of goods sold of $220,000
4. Intercompany profit in beginning inventories
5. Intercompany profit in ending inventories
6. Consolidated accounts receivable of $330,000
7. Noncontrolling interest share of $16,000 (Hint: The amount $16,000 may be incorrect.)
8. Noncontrolling interest at December 31, 2018
9. Investment in Son stock at December 31, 2017
10. Investment income account of $40,000 (Pop’s books)

P7-5
[Based on AICPA] Computations (constructive retirement of subsidiary bonds)
Selected amounts from the separate unconsolidated financial statements of Pam Corporation and its 90
percent–owned subsidiary, Sun Company, at December 31, 2016, are as follows (in thousands).
Pam Sun
Selected Income Statement Amounts
Sales $710 $530
Cost of goods sold 490 370
Gain on sale of equipment — 21
Earnings from investment in subsidiary 63 —
Interest expense — 16
Depreciation 25 20
Selected Balance Sheet Amounts
Cash $ 50 $ 15
Inventories 229 150
Equipment 440 360
Accumulated depreciation (200) (120)
Investment in Sun 189 —
Investment in bonds 91 —
Bonds payable — (200)
Common stock (100) (10)
Additional paid-in capital (250) (40)
Retained earnings (402) (140)
Selected Statement of Retained Earnings Amounts
Beginning balance December 31, 2015 $272 $100
Net income 212 70
Dividends paid 80 30

A D D I T I O N A L I N F O R M AT I O N
1. On January 2, 2016, Pam purchased 90 percent of Sun’s 100,000 outstanding common stock for cash of
$153,000. On that date, Sun’s stockholders’ equity equaled $150,000 and the fair values of Sun’s assets
and liabilities equaled their carrying amounts. Pam correctly accounted for the combination as an acquisi-
tion. The difference between fair value and book value was due to goodwill.
2. On September 4, 2016, Sun paid cash dividends of $30,000.
3. On December 31, 2016, Pam recorded its equity in Sun’s earnings.
4. On January 3, 2016, Sun sold equipment with an original cost of $30,000 and a carrying value of $15,000
to Pam for $36,000. The equipment had a remaining life of three years and was depreciated using the
straight-line method by both companies.
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268 CHAPTER 7

5. During 2016, Sun sold merchandise to Pam for $60,000, which included a profit of $20,000. At December
31, 2016, half of this merchandise remained in Pam’s inventory.
6. On December 31, 2016, Pam paid $91,000 to purchase half of the outstanding bonds issued by Sun. The
bonds mature on December 31, 2022, and were originally issued at par. These bonds pay interest annually
on December 31 of each year, and the interest was paid to the prior investor immediately before Pam’s
purchase of the bonds.

R E Q u I R E D : Determine the amounts at which the following items will appear in the consolidated financial
statements of Pam Corporation and Subsidiary for the year ended December 31, 2016.

1. Cash
2. Equipment less accumulated depreciation
3. Investment in Sun
4. Bonds payable
5. Common stock
6. Beginning retained earnings
7. Dividends declared
8. Gain on retirement of bonds
9. Cost of goods sold
10. Interest expense
11. Depreciation expense

P7-6
Parent Purchases Subsidiary Bonds
On December 31, 2013, Ken AO acquired 80 percent of Nuro AO for $8,000,000 when the total share-
holders equity of Nuro AO was $10,000,000. Below is the trial balance information of both companies
for the year ended December 31, 2014:
Debits Ken AO Nuro AO
Cash $ 1,500 $ 2,000
Accounts receivable 3,640 1,900
Interest receivable 100 0
Inventory 1,600 1,800
Land 2,000 4,200
Equipment-net 2,100 1,100
Building-net 6,000 2,000
Investment in Nuro AO bonds 950 0
Investment in Nuro AO 8,000 0
Cost of sales 11,100 8,800
Interest expense 0 200
Other expenses 1,700 2,100
Dividends 500 800
Total $38,550 $24,900
Credits
Accounts payable $2,400 $900
Interest payable 0 100
10% bonds payable 0 900
Common stock 10,000 5,000
Retained Earnings 12,000 5,000
Sales 14,000 12,000
Gain on sale of building 0 1,000
Interest income 150 0
Total $38,550 $24,900
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Intercompany Profit Transactions—Bonds 269

A D D I T I O N A L I N F O R M AT I O N
1. During 2014, Nuro AO sold inventory to Ken AO for $1,000,000 with gross profit of 20%. Half of this
inventory remained at Ken AO.
2. On July 1, 2014, Ken AO purchased a building from Nuro AO by paying $5,000,000 cash. The building
had useful life of 10 years. Ken AO depreciated the building using straight-line method. Right before the
sale, Nuro AO recorded the building on its book for $4,000,000.
3. On January 1, 2014, Nuro AO had $1,000,000 par of 10 percent bonds with unamortized discount of
$200,000. These bonds matured on January 1, 2016. The bonds pay interest every January 1. At this date,
Ken AO purchased all of Nuro AO’s bonds with a price of $900,000.

REQuIRED: Prepare consolidation workpapers for Ken AO and Subsidiary for the year ended
December 31, 2014.

PROFESSIONAL RESEARCH ASSIGNMENTS

Answer the following questions by reference to the FASB Codification of Accounting Standards.
Include the appropriate reference in your response.

PR 7-1 How should a company determine the fair value of long-term debt?
PR 7-2 A firm issues mandatorily redeemable preferred stock. Should this be classified
as debt or equity in the consolidated financial statements?