Question 1

Pinta Company has total stockholders' equity of $2,000,000 consisting of $400,000 of $1 par value common stock, $400,000 of other contributed capital, and $1,200,000 of retained earnings.Pinta owns 80% of Santa Maria Company purchased at book value.Santa Maria has $800,000 of 5% cumulative preferred stock outstanding.Pinta acquired 40% of the preferred stock of Santa Maria for $200,000.After this transaction the balances in Pinta's retained earnings and other contributed capital accounts are:

Accepted Answer

B

Question 2

The constructive gain or loss to the purchasing company is the difference between the

Accepted Answer

C

Question 3

Use the following information to answer Questions 
Pallet Corporation owns 90% of the outstanding common stock of Stealth Company.On January 1, 2011, Stealth Company issued $500,000, 12%, ten-year bonds.
On January 1, 2013, Pallet Corporation paid $412,000 for Stealth Company bonds with a par value of $400,000 and a carrying value of $393,600.Both companies use the straight-line method to amortize bond premiums and discounts.Pallet Corporation accounts for the investment using the cost method of accounting.
-Compute the noncontrolling interest in the 2013 consolidated income assuming that Pallet Corporation reported a net income of $300,000 (includes dividend income from Stealth Company).Stealth Company reported net income of $180,000 and declared and paid cash dividends of $100,000.

Accepted Answer

The noncontrolling interest is 10% of the net income of Stealth Company, which is $18,000.

Question 4

The constructive gain or loss on an intercompany bond retirement is recognized in the consolidated income statement _________ the recognition of the gain or loss on the individual companies' books.

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The answer of The constructive gain or loss on an...

Question 5

Use the following information to answer Questions 
Polish Company acquired 90% of Sandwich Company's common stock for $780,000 and 40% of its preferred stock for $180,000.On January 1, 2013, the date of acquisition, the companies reported the following account balances: $\begin{array}{lrr}&\text { Polish Company }& \text { Sandwich Company } \
\text { Preferred stock, } \$ 100 \text { par value } & \$ 500,000 & 360,000 \
\text { Common stock, } \$ 10 \text { par value } & 1,200,000 & 600,000 \
\text { Other contributed capital } & 190,000 & 140,000 \
\text { Retained eamings } & 210,000 & 110,000 \
\text { Total stockholders' equity } & \$ 2,100,000 & \$ 1,200,000
\end{array}$ The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value equal to 104% of par value.Dividends were not paid during 2012.During 2013, Sandwich Company reported net income of $120,000 and declared and paid cash dividends in the amount of $70,000.
-Noncontrolling interest in the 2013 reported net income of Sandwich Company is

Accepted Answer

The answer of Use the following information to answer Questions...

Question 6

Use the following information to answer Questions 
Polish Company acquired 90% of Sandwich Company's common stock for $780,000 and 40% of its preferred stock for $180,000.On January 1, 2013, the date of acquisition, the companies reported the following account balances: $\begin{array}{lrr}&\text { Polish Company }& \text { Sandwich Company } \
\text { Preferred stock, } \$ 100 \text { par value } & \$ 500,000 & 360,000 \
\text { Common stock, } \$ 10 \text { par value } & 1,200,000 & 600,000 \
\text { Other contributed capital } & 190,000 & 140,000 \
\text { Retained eamings } & 210,000 & 110,000 \
\text { Total stockholders' equity } & \$ 2,100,000 & \$ 1,200,000
\end{array}$ The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value equal to 104% of par value.Dividends were not paid during 2012.During 2013, Sandwich Company reported net income of $120,000 and declared and paid cash dividends in the amount of $70,000.
-The difference between the implied value of the preferred stock and its book value is

Accepted Answer

The implied value of the preferred stock is calculated as 40% of the liquidation value (104% of par value), which is $149,760. The book value of the preferred stock is 40% of $360,000, which is $144,000. The difference is $149,760 - $144,000 = $5,760. However, the question asks for the difference between the implied value and the book value of the entire preferred stock, not just the 40% acquired. The total implied value is $374,400, and the book value is $360,000, resulting in a difference of $14,400. Since the question asks for the difference for the 40% acquired, the correct answer is $39,600.

Question 7

On a consolidated balance sheet, subsidiary preferred stock will be shown:

Accepted Answer

On a consolidated balance sheet, subsidiary preferred stock held by outside interests is shown as part of the noncontrolling interest. This reflects the portion of the subsidiary that is not controlled by the parent company.

Question 8

If a subsidiary has both common and preferred stock outstanding, a parent must own a controlling interest in

Accepted Answer

According to GAAP (Generally Accepted Accounting Principles), a parent company must own at least 50% of the voting rights associated with a subsidiary's common stock to justify consolidation. Ownership of preferred stock does not impact consolidation. Therefore, the parent must own a controlling interest in the subsidiary's common stock only. Choice B is the correct answer.

Question 9

If the book value of preferred stock is greater than its implied value, the difference is accounted for as an increase in

Accepted Answer

When the book value of preferred stock is greater than its implied value, it means that the company has paid more for the preferred stock than its fair market value. This difference is accounted for as "other contributed capital" which is a component of shareholder's equity. Specifically, it reflects that the company has received more capital from shareholders than it would have if it had sold the preferred stock at its fair market value, and this excess capital is not related to operations or retained earnings. Thus, the correct answer is option C, other contributed capital.

Question 10

Constructive gains and losses from intercompany bond transactions are:

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The answer of Constructive gains and losses from intercompany bond...

Question 11

Which of the following methods of allocating the gain or loss on an intercompany bond retirement is the soundest conceptually?

Accepted Answer

Allocating the gain or loss between the purchasing and issuing companies is the most sound conceptually because it recognizes the effects on both parties involved in the transaction. The company that issued the bonds may have benefited from the lower interest rates that prompted the retirement of the bonds, while the company that purchased the bonds may have incurred a loss if the purchase price was higher than the bond's carrying value. By allocating the gain or loss between the two companies, the impact on both parties is recognized and fairly distributed.

Question 12

Soren Corporation is an 80% owned subsidiary of Passia Company.Soren purchased bonds of Passia Company for $103,000.Passia Company reported the bond liability on the date of purchase at $100,000 less unamortized discount of $5,000.Assuming that the constructive gain or loss is material, the consolidated income statement should report an

Accepted Answer

Since Soren is an 80% owned subsidiary of Passia Company, their financial statements must be consolidated. When Soren purchased the bonds of Passia Company, they paid $103,000. However, Passia Company reported the bond liability on the date of purchase at $100,000 less unamortized discount of $5,000, which means that the bond liability was only valued at $95,000. This creates a constructive gain of $8,000 ($103,000 - $95,000 = $8,000).

Since the gain or loss is material, it needs to be reported on the consolidated income statement. In this case, since the constructive gain was realized from the purchase of bonds, it is considered an ordinary gain of $8,000. However, this is offset by the unamortized discount on the bond liability, which means that the consolidated income statement should report an ordinary loss of $8,000.

Question 13

Search Company is a 90% owned subsidiary of Passage Company.On January 1, 2013, Search Company purchased for $680,000 bonds of Passage Company that had a carrying value of $725,000 (par value $700,000).The bonds mature on December 31, 2014.Both companies use the straight-line method of amortization and have a December 31 year-end.The increase in 2013 consolidated income (i.e., income before subtracting noncontrolling interest) is

Accepted Answer

When Search Company purchased the bonds, there was a difference between the cost of the bonds ($680,000) and their carrying value ($725,000) of $45,000. This difference represents the premium on the bonds. 
Since both companies use the straight-line method of amortization, the premium is amortized over the remaining life of the bonds (2 years). Thus, the amortization of the premium for 2013 is $45,000 / 2 = $22,500. 
Since Search Company is a 90% owned subsidiary, the consolidated income includes 90% of Search Company's income and 100% of Passage Company's income. 
Assuming that Passage Company's income is not affected by the bond purchase, the increase in consolidated income for 2013 is 90% of the amortization of the premium, or 90% of $22,500 = $20,250. 
However, the question asks for the increase in consolidated income before subtracting noncontrolling interest. Since Search Company is a 90% owned subsidiary, noncontrolling interest is equal to 10% of Search Company's income. Thus, the increase in consolidated income before subtracting noncontrolling interest is $20,250 / 0.9 = $22,500. 
Therefore, the correct answer is A) $45,000.

Question 14

From a consolidated entity point of view, the constructive gain or loss on the open market purchase of a parent company's bonds by a subsidiary company is

Accepted Answer

The answer of From a consolidated entity point of view,...

Question 15

The workpaper eliminating entry for a stock dividend declared by the subsidiary includes a

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The answer of The workpaper eliminating entry for a stock...

Question 16

Use the following information to answer Questions 
Pallet Corporation owns 90% of the outstanding common stock of Stealth Company.On January 1, 2011, Stealth Company issued $500,000, 12%, ten-year bonds.
On January 1, 2013, Pallet Corporation paid $412,000 for Stealth Company bonds with a par value of $400,000 and a carrying value of $393,600.Both companies use the straight-line method to amortize bond premiums and discounts.Pallet Corporation accounts for the investment using the cost method of accounting.
-The total gain or loss on the constructive retirement of the debt to be reported in the 2013 consolidated income statement is

Accepted Answer

The answer of Use the following information to answer Questions...

Question 17

Use the following information to answer Questions 
Pallet Corporation owns 90% of the outstanding common stock of Stealth Company.On January 1, 2011, Stealth Company issued $500,000, 12%, ten-year bonds.
On January 1, 2013, Pallet Corporation paid $412,000 for Stealth Company bonds with a par value of $400,000 and a carrying value of $393,600.Both companies use the straight-line method to amortize bond premiums and discounts.Pallet Corporation accounts for the investment using the cost method of accounting.
-Pallet Corporation would report a balance in the Investment in Stealth Company Bonds account on December 31, 2013, of

Accepted Answer

The investment is initially recorded at cost, $412,000. The premium of $18,400 ($412,000 - $393,600) is amortized over the remaining life of the bonds. For 2013, the amortization is $1,500 ($18,400 / 8 years), so the balance on December 31, 2013, is $410,500 ($412,000 - $1,500).

Question 18

On January 1, 2013, Pale Company has $700,000 of 6%, 10-year bonds with an unamortized discount of $28,000.Slugg Company, an 80% subsidiary, purchased $350,000 of these bonds at 102.The gain or (loss) on the retirement of Pale's bonds is:

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The answer of On January 1, 2013, Pale Company has...

Question 19

The parent company records the receipt of shares from a subsidiary's stock dividend as

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The answer of The parent company records the receipt of...

Question 20

Pointe Company purchased bonds from Sentient Company on the open market at a premium.Sentient Company is a 100% owned subsidiary of Pointe Company.Pointe intends to hold the bonds until maturity.In a consolidated balance sheet, the difference between the bond carrying values in the two companies would be:

Accepted Answer

The answer of Pointe Company purchased bonds from Sentient Company...

Quiz 9: Intercompany Bond Holdings and Miscellaneous