Slide AKT 307 AKL 1 8
8-1
Baker / Lembke / King
Intercompany
Indebtedness
8
Electronic Presentation by
Douglas Cloud
Pepperdine University
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Bonds of Affiliate Purchased from a Nonaffiliate
• Acquisition of bonds of an affiliate by another
consolidated entity: Constructive retirement
• If the acquisition value is the same with
liability reported by debtor (at book value), the
elimination is the same with direct intercorporate debt transfer
• Problems if purchase at other than book value
(less than or more than book value)
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-2
Bonds of Affiliate Purchased from a
Nonaffiliate
8-10
8-3
January 1,
20X1 Issuance
of debt for
Rp102,000,000
PT
PTInduk
Induk
PT
PTAnak
Anak
PT
PTNonafiliasi
Nonafiliasi
Purchase of debt by PT Induk for
Rp91,000,000 on December 31, 20X1
Consolidated Entity
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-4
Bond Liability Entries--20X1
On
OnJanuary
January1,1,20X1,
20X1,PT
PTAnak
Anakissues
issues10-year,
10-year,12
12percent,
percent,
semi
semiannually
annuallybonds
bondspayable
payablewith
withaapar
parvalue
valueof
of
Rp100,000,000;
Rp100,000,000;the
thebonds
bondsare
areissued
issuedat
at102.
102. The
Thebonds
bondsare
are
purchased
purchasedfrom
fromPT
PTAnak
Anakby
byPT
PTNonafiliasi.
Nonafiliasi.
Entry by PT Anak
(15) Jan. 1 Cash
102,000,000
Bonds Payable
Premium on Bonds Payable
Sale of bonds to Nonaffiliated.
100,000,000
2,000,000
PT Anak
Rp100,000
,000
PT Anak
Rp100,000,
000
PT Anak
McGraw-Hill/ Irwin
PT Nonafiliasi
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Bond Liability Entries--20X1
Entries by PT Anak
(16) June 30 Interest Expense
5,900,000
Premium on Bonds Payable
100,000
Cash
6,000,000
Semiannual payment of interest.
(17)Dec. 31 Interest Expense
5,900,000
Premium on Bonds Payable Rp2,000,000
100,000
÷ 20 interest
Rp100,000,000
Cash
6,000,000
periods
x .12 x 6/12
Semiannual payment of interest.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-5
Bond Investment Entry--20X1
Entries by PT Induk
(18) Dec. 31 Investment in PT Anak Bonds 91,000,000
Cash
91,000,000
Purchase of PT Anak bonds
from PT Nonafiliasi.
This
This entry
entry isis the
the same
same as
as ifif the
the bonds
bonds purchased
purchased
were
were those
those of
of an
an unrelated
unrelated company.
company.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-6
Constructive Debt Retirement-20X1
Computation
Computationof
ofGain
Gainon
onConstructive
ConstructiveRetirement
Retirement
Book value of PT Anak’ bonds,
December 31, 20X1
Rp101,800,000
Price paid by PT Induk to purchase bonds
-91,000,000
Gain on constructive retirement of bonds Rp 10,800,000
Constructive
Constructive gain
gain or
or loss
loss isis assigned
assigned to
to the
the
issuing
issuing company.
company.
ItIt isis shown
shown only
only in
in consolidation
consolidation process
process
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-7
8-8
Basic Equity-Method Entries--20X1
Entries by PT Induk
(20) Investment in PT Anak Bonds
40,000,000
Income from Subsidiary
Record equity-method income:
Rp50,000,000 x .80
24,000,000
Investment in PT Anak Stock
Record dividends from PT Anak:
Rp30,000,000 x .80
40,000,000
(19) Cash
McGraw-Hill/ Irwin
24,000,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Constructive Debt Retirement--20X1 (in ‘000)
PT Induk
PT Anak
Item
Income from
Subsidiary
40,000
Dividends
Declared
(60,000)
Investment in
PT Anak
Stock
Eliminations
Debits
Credits
Consolidated
(30,000)
256,000
An
An entry
entry isis needed
needed to
to eliminate
eliminate the
the investment
investment account
account
during
during 20X1,
20X1, the
the parent’s
parent’s share
share of
of the
the subsidiary’s
subsidiary’s net
net
income,
income, and
and the
the dividends
dividends recognized
recognized during
during the
the year.
year.
McGraw-Hill/ Irwin
8-9
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-10
Constructive Debt Retirement--20X1 (in ‘000)
PT Induk
PT Anak
Item
Income from
Subsidiary
40,000
Dividends
Declared
(60,000)
Investment in
PT Anak
Stock
McGraw-Hill/ Irwin
256,000
Eliminations
Debits
Credits
Consolidated
40,000
(30,000)
24,000
16,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Noncontrolling Interest’s Share of Income
Net income of PT Anak
Rp50,000,000
Gain on constructive retirement of
bond
Realized net income of PT Anak
10,800,000
Rp60,800,000
Noncontrolling stockholders’ share x
.20
Noncontrolling interest’s share
of income
McGraw-Hill/ Irwin
Rp12,160,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-11
8-12
Constructive Debt Retirement--20X1 (in ‘000)
PT Induk
PT Anak
Item
Eliminations
Debits
Credits
Consolidated
Income to
Noncontrolling
Interest
Dividends
Declared
(60,000)
(30,000)
(21)
24,000
Noncontrolling
Interest
An
Anentry
entry isisrequired
requiredeliminate
eliminatethe
theincome
incomefrom
fromthe
thesubsidiary.
subsidiary.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-13
Constructive Debt Retirement--20X1 (in ‘000)
PT Induk
PT Anak
Item
Income to
Noncontrolling
Interest
Dividends
Declared
Noncontrolling
Interest
McGraw-Hill/ Irwin
Eliminations
Debits
Credits
(22) 12,160
(60,000)
(30,000)
Consolidated
(12,160)
24,000
(22) 6,000
(21)
(22)
(60,000)
6,160
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-14
Constructive Debt Retirement--20X1 (in ‘000)
PT Induk
PT Anak
Item
Retained Earnings, Jan. 1
Investment in
PT Anak
Stock
Common Stock
Noncontrolling
Interest
300,000
Consolidated
100,000
256,000
500,000
Eliminations
Debits
Credits
(21)
16,000
200,000
(22)
6,160
An
Anentry
entry isisnecessary
necessaryto
toeliminate
eliminatePT
PTInduk’s
Induk’sinvestment
investmentaccount
account
and
andthe
thestockholders’
stockholders’equity
equitybalances
balancesof
ofPT
PTAnak
Anakatatthe
the
beginning
beginningof
ofthe
theyear,
year,and
andestablish
establishthe
theamount
amountof
ofthe
the
noncontrolling
noncontrollinginterest
interestatatthe
thebeginning
beginningof
ofthe
theyear.
year.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-15
Constructive Debt Retirement--20X1 (in ‘000)
PT Induk
PT Anak
Item
Retained Earnings, Jan. 1
Investment in
PT Anak
Stock
Common Stock
Noncontrolling
Interest
300,000
100,000
Eliminations
Debits
Credits
(23)100,000
256,000
500,000
300,000
16,000
(23) 240,000
(21)
200,000
(23)200,000
500,000
(23)
McGraw-Hill/ Irwin
Consolidated
6,160
60,000
66,160
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidated Balances--20X1
Item
PT Induk
PT Anak
8-16
Unadjusted Consolidated
Totals
Amounts
Bonds Payable
-0- Rp(100,000,000) Rp(100,000,000)
-0Premium on
Bonds Payable
-0(1,800,000)
(1,800,000)
-0Investment
in Bonds
Rp91,000,000
-091,000,000
-0Interest Expense
-0Rp 11,800,000
Rp 11,800,000 Rp11,800,000
Interest Income
-0-0-0-0Gain on Bond
Retirement
-0-0-0- (10,800,000)
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-17
Constructive Debt Retirement--20X1 (in ‘000)
PT Induk
PT Anak
Item
Eliminations
Debits
Credits
Consolidated
Gain on Bond
Retirement
Investment in
PT Anak
Bonds
Bonds Payable
Premium on
Bonds Payable
91,000
200,000
100,000
1,800
An
Anentry
entry isisrequired
requiredto
toeliminate
eliminatethe
the
intercompany
intercompanybond
bondholdings
holdingsand
andrecognize
recognizethe
the
gain
gainon
onconstructive
constructiveretirement
retirementof
ofthe
thebonds.
bonds.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-18
Constructive Debt Retirement--20X1 (in ‘000)
PT Induk
PT Anak
Eliminations
Debits
Credits
Item
Gain on Bond
Retirement
Investment in
PT Anak
Bonds
Bonds Payable
Premium on
Bonds Payable
McGraw-Hill/ Irwin
91,000
200,000
100,000
1,800
(24)100,000
(24)
(24)
10,800
(24)
91,000
Consolidated
10,800
200,000
1,800
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-19
Consolidated Net Income--20X1
PT Induk’s separate operating income
Rp140,000,000
PT Induk’s share of PT Anak’ income:
PT Anak’ net income
Rp50,000,000
Gain on constructive retirement
of bonds
10,800,000
PT Anak’ realized income
Rp60,800,000
PT Induk’s proportionate share
Consolidated net income, 20X1
McGraw-Hill/ Irwin
x
.80
48,640,000
Rp188,640,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-20
Noncontrolling Interest--20X1
Book value of PT Anak, December 31, 20X1:
Common stock
Rp200,000,000
Retained earnings
120,000,000
Total reported book value
Rp320,000,000
Gain on constructive retirement of bonds
10,800,000
Realized book value of PT Anak
Rp330,800,000
Noncontrolling stockholders’ share
x
.20
Noncontrolling interest, December 31, 20X1 Rp 66,160,000
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Bond Liability Entries--20X2
Entries by PT Anak
(25) June 30 Interest Expense
5,900,000
Premium on Bonds Payable
100,000
Cash
6,000,000
Semiannual payment of interest.
(26)Dec. 31 Interest Expense
5,900,000
Premium on Bonds Payable Rp2,000,000
100,000
÷ 20 interest
Rp100,000,000
Cash
6,000,000
periods
x .12 x 6/12
Semiannual payment of interest.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-21
8-22
Bond Investment Entry--20X2
Entries by PT Induk
(27) June 30 Cash
6,000,000
Investment in PT Anak Bonds 500,000
Interest Income
6,500,000
.
(28) Dec 31 Cash
6,000,000
Investment in SF Bonds
500,000
Interest Income
Record receipt of Bond Interest.
6,500,000
Amortization of discount recorded per year: (Rp100,000,000 Rp91,000,000) / 9 = Rp1,000,000.
Per semester = Rp1,000,000 / 2 = Rp500,000
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-23
Subsequent Recognition of Gain
Bond
premium
Rp2,000,000
Rp1,800,000
Bond
discount
Rp9,000,000
Issue
McGraw-Hill/ Irwin
Book value of
bond liability
Rp100,000,000
Constructive
gain of
Rp10,800,000
Purchase
by affiliate
Carrying amount of
bond investment
Maturity
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Subsequent Recognition of Gain
At Dec 20X1, Constructive Gain of Rp10,800,000 can be
divided into:
PT Induk’ discount on bond investment
9,000,000
PT Anak’s premium on bond liability
1,800,000
Total constructive gain on retirement
10,800,000
Subsequent recognition:
PT Induk’discount amortization
(9,000,000 / 9 years)
1,000,000
PT Anak’s premium amortization
(1,800,000 / 9 years)
200,000
Annual increase each year
1,200,000
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-24
8-25
Investment Account--20X2
Investment in PT Anak Stock
Original cost
240,000,000
20X1
Equity accrual
(Rp50,000,000 x .80) 40,000,000
Balance, 12/31/X1
256,000,000
Equity accrual
(Rp75,000,000 x .80) 60,000,000
Balance, 12/31/X2
284,000,000
McGraw-Hill/ Irwin
Dividends
(Rp30,000,000 x .80)
24,000,000
Dividends
(Rp40,000,000 x .80)
32,000,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000)
PT Induk
PT Anak
Item
Income from
Subsidiary
60,000
Dividends
Declared
(60,000)
Investment in
PT Anak
Stock
Eliminations
Debits
Credits
Consolidated
(40,000)
284,000
An
An entry
entry isis needed
needed to
to eliminate
eliminate the
the investment
investment account
account
during
during 20X2,
20X2, the
the parent’s
parent’s share
share of
of the
the subsidiary’s
subsidiary’s net
net
income,
income, and
and the
the dividends
dividends recognized
recognized during
during the
the year.
year.
McGraw-Hill/ Irwin
8-26
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000)
PT Induk
PT Anak
Item
Income from
Subsidiary
60,000
Dividends
Declared
(60,000)
Investment in
PT Anak
Stock
McGraw-Hill/ Irwin
284,000
Eliminations
Debits
Credits
Consolidated
(31) 60,000
(40,000)
(31)
32,000
(31)
28,000
8-27
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Noncontrolling Interest’s Share of Income
Net income of PT Anak
Rp75,000,000
Less gain on constructive retirement of
bond recognized in 2002:
Amort. PT Induk’s Bond discount (1,000,000)
Amort PT Anak’s Bond Premium
Realized net income of PT Anak
(200,000)
Rp73,800,000
Noncontrolling stockholders’ share x
.20
Noncontrolling interest’s share
of income
McGraw-Hill/ Irwin
Rp14,760,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-28
Consolidation Workpaper--20X2 (in ‘000)
PT Induk
PT Anak
Item
Eliminations
Debits
Credits
8-29
Consolidated
Income to
Noncontrolling
Interest
Dividends
Declared
(60,000)
(40,000)
(31)
32,000
Noncontrolling
Interest
An
Anentry
entry isisrequired
requiredeliminate
eliminatethe
theincome
incomefrom
fromthe
thesubsidiary.
subsidiary.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000)
PT Induk
PT Anak
Item
Income to
Noncontrolling
Interest
Dividends
Declared
Noncontrolling
Interest
McGraw-Hill/ Irwin
Eliminations
Debits
Credits
(32) 14,760
(60,000)
(40,000)
Consolidated
(14,760)
(32)
32,000
8,000
(32)
6,760
(31)
8-30
(60,000)
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000)
PT Induk
PT Anak
Item
Retained Earnings, Jan. 1
Investment in
PT Anak
Stock
Common Stock
Noncontrolling
Interest
420,000
Consolidated
120,000
284,000
500,000
Eliminations
Debits
Credits
8-31
(21)
28,000
200,000
(32)
6,760
An
Anentry
entry isisnecessary
necessaryto
toeliminate
eliminatePT
PTInduk’s
Induk’sinvestment
investmentaccount
account
and
andthe
thestockholders’
stockholders’equity
equitybalances
balancesof
ofPT
PTAnak
Anakatatthe
the
beginning
beginningof
ofthe
theyear,
year,and
andestablish
establishthe
theamount
amountof
ofthe
the
noncontrolling
noncontrollinginterest
interestatatthe
thebeginning
beginningof
ofthe
theyear.
year.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000)
PT Induk
PT Anak
Item
Retained Earnings, Jan. 1
Investment in
PT Anak
Stock
Common Stock
Noncontrolling
Interest
420,000
120,000
Eliminations
Debits
Credits
(33)120,000
284,000
500,000
420,000
28,000
(33) 256,000
(33)200,000
500,000
(32)
(33)
McGraw-Hill/ Irwin
Consolidated
(31)
200,000
8-32
6,760
64,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-33
Journal elimination no 34 – 20X2
Bonds Payable
100,000,000
Premium on B/P
1,600,000
Interest Income
13,000,000
Investment in PT Anak Bonds
Interest Expense
R/E, Jan 1
Noncontrolling Interest
McGraw-Hill/ Irwin
92,000,000
11,800,000
8,640,000
2,160,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000)
PT Induk
PT Anak
Item
Interest Income
Interest Expense
Investment in
PT Anak
Bonds
Bonds Payable
Premium on
Bonds Payable
Noncontrolling
Interest
13,000
20,000
Eliminations
Debits
Credits
Consolidated
11,800
92,000
200,000
100,000
1,600
(32)
(33)
6,760
4,000
An
Anentry
entry isisrequired
requiredto
toeliminate
eliminateintercompany
intercompany holdings.
holdings.
McGraw-Hill/ Irwin
8-34
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000)
PT Induk
PT Anak
Eliminations
Debits
Credits
Item
Retained Earnings, Jan. 1
Interest Income
Interest Expense
Investment in
PT Anak
Bonds
Bonds Payable
Premium on
Bonds Payable
Noncontrolling
Interest
420,000
13,000
20,000
120,000
(33)
(34)
120,000
13,000
11,800
92,000
200,000
100,000
1,600
428,640
(34)
11,800
20,000
(34)
92,000
200,000
1,600
(32)
(33)
(34)
McGraw-Hill/ Irwin
Consolidated
8,640
(34)
(34) 100,000
(34)
8-35
6,760
4,000
2,160
72,920
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-36
Consolidated Net Income--20X2
PT Induk’s separate operating income
Rp173,000,000
PT Induk’s share of PT Anak’ income:
PT Anak’ net income
Rp75,000,000
PT Induk’s amortization of bond
discount
- 1,000,000
PT Anak’ amortization of bond
premium
- 200,000
Income as a basis of apportionmentRp73,800,000
PT Induk’s proportionate share
Consolidated net income, 20X2
McGraw-Hill/ Irwin
x
.80
59,040,000
Rp232,040,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Journal elimination for B/P – 20X3
Bonds Payable
100,000,000
Premium on B/P
1,400,000
Interest Income
13,000,000
Investment in PT Anak Bonds
Interest Expense
R/E, Jan 1
Noncontrolling Interest
McGraw-Hill/ Irwin
93,000,000
11,800,000
7,680,000
1,920,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-37
Purchase at Greater than Book Value
• When an affiliate’s bonds are purchased from
a nonaffiliate at an amount greater than their
book value, a loss is recognized on the
constructive retirement of the debt.
• All other aspects of the consolidation process
remain the same, that is, there are no other
differences between constructive loss and a
constructive gain.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-38
You Will Survive This Chapter !!!
• The effects of intercompany debt transactions
must be eliminated completely in preparing
consolidated financial statements, just as with
other types of intercompany transactions.
• Only debt transactions between the
consolidated entity and unaffiliated parties are
reported in the consolidated statements.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-39
8-40
Chapter Eight
The
End
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Baker / Lembke / King
Intercompany
Indebtedness
8
Electronic Presentation by
Douglas Cloud
Pepperdine University
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Bonds of Affiliate Purchased from a Nonaffiliate
• Acquisition of bonds of an affiliate by another
consolidated entity: Constructive retirement
• If the acquisition value is the same with
liability reported by debtor (at book value), the
elimination is the same with direct intercorporate debt transfer
• Problems if purchase at other than book value
(less than or more than book value)
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-2
Bonds of Affiliate Purchased from a
Nonaffiliate
8-10
8-3
January 1,
20X1 Issuance
of debt for
Rp102,000,000
PT
PTInduk
Induk
PT
PTAnak
Anak
PT
PTNonafiliasi
Nonafiliasi
Purchase of debt by PT Induk for
Rp91,000,000 on December 31, 20X1
Consolidated Entity
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-4
Bond Liability Entries--20X1
On
OnJanuary
January1,1,20X1,
20X1,PT
PTAnak
Anakissues
issues10-year,
10-year,12
12percent,
percent,
semi
semiannually
annuallybonds
bondspayable
payablewith
withaapar
parvalue
valueof
of
Rp100,000,000;
Rp100,000,000;the
thebonds
bondsare
areissued
issuedat
at102.
102. The
Thebonds
bondsare
are
purchased
purchasedfrom
fromPT
PTAnak
Anakby
byPT
PTNonafiliasi.
Nonafiliasi.
Entry by PT Anak
(15) Jan. 1 Cash
102,000,000
Bonds Payable
Premium on Bonds Payable
Sale of bonds to Nonaffiliated.
100,000,000
2,000,000
PT Anak
Rp100,000
,000
PT Anak
Rp100,000,
000
PT Anak
McGraw-Hill/ Irwin
PT Nonafiliasi
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Bond Liability Entries--20X1
Entries by PT Anak
(16) June 30 Interest Expense
5,900,000
Premium on Bonds Payable
100,000
Cash
6,000,000
Semiannual payment of interest.
(17)Dec. 31 Interest Expense
5,900,000
Premium on Bonds Payable Rp2,000,000
100,000
÷ 20 interest
Rp100,000,000
Cash
6,000,000
periods
x .12 x 6/12
Semiannual payment of interest.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-5
Bond Investment Entry--20X1
Entries by PT Induk
(18) Dec. 31 Investment in PT Anak Bonds 91,000,000
Cash
91,000,000
Purchase of PT Anak bonds
from PT Nonafiliasi.
This
This entry
entry isis the
the same
same as
as ifif the
the bonds
bonds purchased
purchased
were
were those
those of
of an
an unrelated
unrelated company.
company.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-6
Constructive Debt Retirement-20X1
Computation
Computationof
ofGain
Gainon
onConstructive
ConstructiveRetirement
Retirement
Book value of PT Anak’ bonds,
December 31, 20X1
Rp101,800,000
Price paid by PT Induk to purchase bonds
-91,000,000
Gain on constructive retirement of bonds Rp 10,800,000
Constructive
Constructive gain
gain or
or loss
loss isis assigned
assigned to
to the
the
issuing
issuing company.
company.
ItIt isis shown
shown only
only in
in consolidation
consolidation process
process
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-7
8-8
Basic Equity-Method Entries--20X1
Entries by PT Induk
(20) Investment in PT Anak Bonds
40,000,000
Income from Subsidiary
Record equity-method income:
Rp50,000,000 x .80
24,000,000
Investment in PT Anak Stock
Record dividends from PT Anak:
Rp30,000,000 x .80
40,000,000
(19) Cash
McGraw-Hill/ Irwin
24,000,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Constructive Debt Retirement--20X1 (in ‘000)
PT Induk
PT Anak
Item
Income from
Subsidiary
40,000
Dividends
Declared
(60,000)
Investment in
PT Anak
Stock
Eliminations
Debits
Credits
Consolidated
(30,000)
256,000
An
An entry
entry isis needed
needed to
to eliminate
eliminate the
the investment
investment account
account
during
during 20X1,
20X1, the
the parent’s
parent’s share
share of
of the
the subsidiary’s
subsidiary’s net
net
income,
income, and
and the
the dividends
dividends recognized
recognized during
during the
the year.
year.
McGraw-Hill/ Irwin
8-9
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-10
Constructive Debt Retirement--20X1 (in ‘000)
PT Induk
PT Anak
Item
Income from
Subsidiary
40,000
Dividends
Declared
(60,000)
Investment in
PT Anak
Stock
McGraw-Hill/ Irwin
256,000
Eliminations
Debits
Credits
Consolidated
40,000
(30,000)
24,000
16,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Noncontrolling Interest’s Share of Income
Net income of PT Anak
Rp50,000,000
Gain on constructive retirement of
bond
Realized net income of PT Anak
10,800,000
Rp60,800,000
Noncontrolling stockholders’ share x
.20
Noncontrolling interest’s share
of income
McGraw-Hill/ Irwin
Rp12,160,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-11
8-12
Constructive Debt Retirement--20X1 (in ‘000)
PT Induk
PT Anak
Item
Eliminations
Debits
Credits
Consolidated
Income to
Noncontrolling
Interest
Dividends
Declared
(60,000)
(30,000)
(21)
24,000
Noncontrolling
Interest
An
Anentry
entry isisrequired
requiredeliminate
eliminatethe
theincome
incomefrom
fromthe
thesubsidiary.
subsidiary.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-13
Constructive Debt Retirement--20X1 (in ‘000)
PT Induk
PT Anak
Item
Income to
Noncontrolling
Interest
Dividends
Declared
Noncontrolling
Interest
McGraw-Hill/ Irwin
Eliminations
Debits
Credits
(22) 12,160
(60,000)
(30,000)
Consolidated
(12,160)
24,000
(22) 6,000
(21)
(22)
(60,000)
6,160
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-14
Constructive Debt Retirement--20X1 (in ‘000)
PT Induk
PT Anak
Item
Retained Earnings, Jan. 1
Investment in
PT Anak
Stock
Common Stock
Noncontrolling
Interest
300,000
Consolidated
100,000
256,000
500,000
Eliminations
Debits
Credits
(21)
16,000
200,000
(22)
6,160
An
Anentry
entry isisnecessary
necessaryto
toeliminate
eliminatePT
PTInduk’s
Induk’sinvestment
investmentaccount
account
and
andthe
thestockholders’
stockholders’equity
equitybalances
balancesof
ofPT
PTAnak
Anakatatthe
the
beginning
beginningof
ofthe
theyear,
year,and
andestablish
establishthe
theamount
amountof
ofthe
the
noncontrolling
noncontrollinginterest
interestatatthe
thebeginning
beginningof
ofthe
theyear.
year.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-15
Constructive Debt Retirement--20X1 (in ‘000)
PT Induk
PT Anak
Item
Retained Earnings, Jan. 1
Investment in
PT Anak
Stock
Common Stock
Noncontrolling
Interest
300,000
100,000
Eliminations
Debits
Credits
(23)100,000
256,000
500,000
300,000
16,000
(23) 240,000
(21)
200,000
(23)200,000
500,000
(23)
McGraw-Hill/ Irwin
Consolidated
6,160
60,000
66,160
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidated Balances--20X1
Item
PT Induk
PT Anak
8-16
Unadjusted Consolidated
Totals
Amounts
Bonds Payable
-0- Rp(100,000,000) Rp(100,000,000)
-0Premium on
Bonds Payable
-0(1,800,000)
(1,800,000)
-0Investment
in Bonds
Rp91,000,000
-091,000,000
-0Interest Expense
-0Rp 11,800,000
Rp 11,800,000 Rp11,800,000
Interest Income
-0-0-0-0Gain on Bond
Retirement
-0-0-0- (10,800,000)
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-17
Constructive Debt Retirement--20X1 (in ‘000)
PT Induk
PT Anak
Item
Eliminations
Debits
Credits
Consolidated
Gain on Bond
Retirement
Investment in
PT Anak
Bonds
Bonds Payable
Premium on
Bonds Payable
91,000
200,000
100,000
1,800
An
Anentry
entry isisrequired
requiredto
toeliminate
eliminatethe
the
intercompany
intercompanybond
bondholdings
holdingsand
andrecognize
recognizethe
the
gain
gainon
onconstructive
constructiveretirement
retirementof
ofthe
thebonds.
bonds.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-18
Constructive Debt Retirement--20X1 (in ‘000)
PT Induk
PT Anak
Eliminations
Debits
Credits
Item
Gain on Bond
Retirement
Investment in
PT Anak
Bonds
Bonds Payable
Premium on
Bonds Payable
McGraw-Hill/ Irwin
91,000
200,000
100,000
1,800
(24)100,000
(24)
(24)
10,800
(24)
91,000
Consolidated
10,800
200,000
1,800
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-19
Consolidated Net Income--20X1
PT Induk’s separate operating income
Rp140,000,000
PT Induk’s share of PT Anak’ income:
PT Anak’ net income
Rp50,000,000
Gain on constructive retirement
of bonds
10,800,000
PT Anak’ realized income
Rp60,800,000
PT Induk’s proportionate share
Consolidated net income, 20X1
McGraw-Hill/ Irwin
x
.80
48,640,000
Rp188,640,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-20
Noncontrolling Interest--20X1
Book value of PT Anak, December 31, 20X1:
Common stock
Rp200,000,000
Retained earnings
120,000,000
Total reported book value
Rp320,000,000
Gain on constructive retirement of bonds
10,800,000
Realized book value of PT Anak
Rp330,800,000
Noncontrolling stockholders’ share
x
.20
Noncontrolling interest, December 31, 20X1 Rp 66,160,000
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Bond Liability Entries--20X2
Entries by PT Anak
(25) June 30 Interest Expense
5,900,000
Premium on Bonds Payable
100,000
Cash
6,000,000
Semiannual payment of interest.
(26)Dec. 31 Interest Expense
5,900,000
Premium on Bonds Payable Rp2,000,000
100,000
÷ 20 interest
Rp100,000,000
Cash
6,000,000
periods
x .12 x 6/12
Semiannual payment of interest.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-21
8-22
Bond Investment Entry--20X2
Entries by PT Induk
(27) June 30 Cash
6,000,000
Investment in PT Anak Bonds 500,000
Interest Income
6,500,000
.
(28) Dec 31 Cash
6,000,000
Investment in SF Bonds
500,000
Interest Income
Record receipt of Bond Interest.
6,500,000
Amortization of discount recorded per year: (Rp100,000,000 Rp91,000,000) / 9 = Rp1,000,000.
Per semester = Rp1,000,000 / 2 = Rp500,000
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-23
Subsequent Recognition of Gain
Bond
premium
Rp2,000,000
Rp1,800,000
Bond
discount
Rp9,000,000
Issue
McGraw-Hill/ Irwin
Book value of
bond liability
Rp100,000,000
Constructive
gain of
Rp10,800,000
Purchase
by affiliate
Carrying amount of
bond investment
Maturity
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Subsequent Recognition of Gain
At Dec 20X1, Constructive Gain of Rp10,800,000 can be
divided into:
PT Induk’ discount on bond investment
9,000,000
PT Anak’s premium on bond liability
1,800,000
Total constructive gain on retirement
10,800,000
Subsequent recognition:
PT Induk’discount amortization
(9,000,000 / 9 years)
1,000,000
PT Anak’s premium amortization
(1,800,000 / 9 years)
200,000
Annual increase each year
1,200,000
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-24
8-25
Investment Account--20X2
Investment in PT Anak Stock
Original cost
240,000,000
20X1
Equity accrual
(Rp50,000,000 x .80) 40,000,000
Balance, 12/31/X1
256,000,000
Equity accrual
(Rp75,000,000 x .80) 60,000,000
Balance, 12/31/X2
284,000,000
McGraw-Hill/ Irwin
Dividends
(Rp30,000,000 x .80)
24,000,000
Dividends
(Rp40,000,000 x .80)
32,000,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000)
PT Induk
PT Anak
Item
Income from
Subsidiary
60,000
Dividends
Declared
(60,000)
Investment in
PT Anak
Stock
Eliminations
Debits
Credits
Consolidated
(40,000)
284,000
An
An entry
entry isis needed
needed to
to eliminate
eliminate the
the investment
investment account
account
during
during 20X2,
20X2, the
the parent’s
parent’s share
share of
of the
the subsidiary’s
subsidiary’s net
net
income,
income, and
and the
the dividends
dividends recognized
recognized during
during the
the year.
year.
McGraw-Hill/ Irwin
8-26
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000)
PT Induk
PT Anak
Item
Income from
Subsidiary
60,000
Dividends
Declared
(60,000)
Investment in
PT Anak
Stock
McGraw-Hill/ Irwin
284,000
Eliminations
Debits
Credits
Consolidated
(31) 60,000
(40,000)
(31)
32,000
(31)
28,000
8-27
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Noncontrolling Interest’s Share of Income
Net income of PT Anak
Rp75,000,000
Less gain on constructive retirement of
bond recognized in 2002:
Amort. PT Induk’s Bond discount (1,000,000)
Amort PT Anak’s Bond Premium
Realized net income of PT Anak
(200,000)
Rp73,800,000
Noncontrolling stockholders’ share x
.20
Noncontrolling interest’s share
of income
McGraw-Hill/ Irwin
Rp14,760,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-28
Consolidation Workpaper--20X2 (in ‘000)
PT Induk
PT Anak
Item
Eliminations
Debits
Credits
8-29
Consolidated
Income to
Noncontrolling
Interest
Dividends
Declared
(60,000)
(40,000)
(31)
32,000
Noncontrolling
Interest
An
Anentry
entry isisrequired
requiredeliminate
eliminatethe
theincome
incomefrom
fromthe
thesubsidiary.
subsidiary.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000)
PT Induk
PT Anak
Item
Income to
Noncontrolling
Interest
Dividends
Declared
Noncontrolling
Interest
McGraw-Hill/ Irwin
Eliminations
Debits
Credits
(32) 14,760
(60,000)
(40,000)
Consolidated
(14,760)
(32)
32,000
8,000
(32)
6,760
(31)
8-30
(60,000)
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000)
PT Induk
PT Anak
Item
Retained Earnings, Jan. 1
Investment in
PT Anak
Stock
Common Stock
Noncontrolling
Interest
420,000
Consolidated
120,000
284,000
500,000
Eliminations
Debits
Credits
8-31
(21)
28,000
200,000
(32)
6,760
An
Anentry
entry isisnecessary
necessaryto
toeliminate
eliminatePT
PTInduk’s
Induk’sinvestment
investmentaccount
account
and
andthe
thestockholders’
stockholders’equity
equitybalances
balancesof
ofPT
PTAnak
Anakatatthe
the
beginning
beginningof
ofthe
theyear,
year,and
andestablish
establishthe
theamount
amountof
ofthe
the
noncontrolling
noncontrollinginterest
interestatatthe
thebeginning
beginningof
ofthe
theyear.
year.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000)
PT Induk
PT Anak
Item
Retained Earnings, Jan. 1
Investment in
PT Anak
Stock
Common Stock
Noncontrolling
Interest
420,000
120,000
Eliminations
Debits
Credits
(33)120,000
284,000
500,000
420,000
28,000
(33) 256,000
(33)200,000
500,000
(32)
(33)
McGraw-Hill/ Irwin
Consolidated
(31)
200,000
8-32
6,760
64,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-33
Journal elimination no 34 – 20X2
Bonds Payable
100,000,000
Premium on B/P
1,600,000
Interest Income
13,000,000
Investment in PT Anak Bonds
Interest Expense
R/E, Jan 1
Noncontrolling Interest
McGraw-Hill/ Irwin
92,000,000
11,800,000
8,640,000
2,160,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000)
PT Induk
PT Anak
Item
Interest Income
Interest Expense
Investment in
PT Anak
Bonds
Bonds Payable
Premium on
Bonds Payable
Noncontrolling
Interest
13,000
20,000
Eliminations
Debits
Credits
Consolidated
11,800
92,000
200,000
100,000
1,600
(32)
(33)
6,760
4,000
An
Anentry
entry isisrequired
requiredto
toeliminate
eliminateintercompany
intercompany holdings.
holdings.
McGraw-Hill/ Irwin
8-34
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000)
PT Induk
PT Anak
Eliminations
Debits
Credits
Item
Retained Earnings, Jan. 1
Interest Income
Interest Expense
Investment in
PT Anak
Bonds
Bonds Payable
Premium on
Bonds Payable
Noncontrolling
Interest
420,000
13,000
20,000
120,000
(33)
(34)
120,000
13,000
11,800
92,000
200,000
100,000
1,600
428,640
(34)
11,800
20,000
(34)
92,000
200,000
1,600
(32)
(33)
(34)
McGraw-Hill/ Irwin
Consolidated
8,640
(34)
(34) 100,000
(34)
8-35
6,760
4,000
2,160
72,920
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-36
Consolidated Net Income--20X2
PT Induk’s separate operating income
Rp173,000,000
PT Induk’s share of PT Anak’ income:
PT Anak’ net income
Rp75,000,000
PT Induk’s amortization of bond
discount
- 1,000,000
PT Anak’ amortization of bond
premium
- 200,000
Income as a basis of apportionmentRp73,800,000
PT Induk’s proportionate share
Consolidated net income, 20X2
McGraw-Hill/ Irwin
x
.80
59,040,000
Rp232,040,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Journal elimination for B/P – 20X3
Bonds Payable
100,000,000
Premium on B/P
1,400,000
Interest Income
13,000,000
Investment in PT Anak Bonds
Interest Expense
R/E, Jan 1
Noncontrolling Interest
McGraw-Hill/ Irwin
93,000,000
11,800,000
7,680,000
1,920,000
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-37
Purchase at Greater than Book Value
• When an affiliate’s bonds are purchased from
a nonaffiliate at an amount greater than their
book value, a loss is recognized on the
constructive retirement of the debt.
• All other aspects of the consolidation process
remain the same, that is, there are no other
differences between constructive loss and a
constructive gain.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-38
You Will Survive This Chapter !!!
• The effects of intercompany debt transactions
must be eliminated completely in preparing
consolidated financial statements, just as with
other types of intercompany transactions.
• Only debt transactions between the
consolidated entity and unaffiliated parties are
reported in the consolidated statements.
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
8-39
8-40
Chapter Eight
The
End
McGraw-Hill/ Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.