1. Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 9: Intercompany Bond Holdings and Miscellaneous Topics
Slides Authored by Hannah Wong, Ph.D.
Rutgers University

2. Intercompany Bond Holdings
Bonds acquired by an affiliate are no longer held by external parties
In the consolidated financial statements:
the bonds are viewed as being constructively retired
record a gain or loss on this early retirement of debt
obj 1

3. Allocation of Constructive Gain/Loss
Entirely to the issuing company
Entirely to the purchasing company
Entirely to the parent company
Allocated between the purchasing and issuing companies
Note: the allocation method affects the consolidated
net income each year. However, it does not affect
the total consolidated net income over the life of the issue.
obj 1, 2

4. Computation of Constructive Gain/Loss
Book value
Constructive gain/loss
allocated to issuing company
Par value
Constructive gain/loss
allocated to
purchasing company
Purchase price
obj 2

5. Accounting for Intercompany Bonds
An Example
12/31/2001
12/31/2003
P acquired S’s
9% bonds
Bond matures
Par value of bonds acquired = $500,000 x 60%
Book value of bonds acquired = $480,000 x 60%
Purchase price = $310,000
obj 2

6. Accounting for Intercompany Bonds
Book value
$288,000
Constructive loss
allocated to S Company
$12,000
Par value $300,000
Constructive loss
allocated to P Company
$10,000
Purchase price $310,000
obj 2

7. Accounting for Intercompany Bonds
Year of Intercompany Bond Purchase - EE’s
Loss on constructive retirement of bonds 10,000
Investment in S Bonds 10,000
(1) To recognize the constructive loss not recorded by P and
(2) adjust the intercompany bonds to par value
Loss on constructive retirement of bonds 12,000
Discount on bonds payable 12,000
(1) To recognize the constructive loss not recorded by S and
(2) adjust the intercompany bonds to par value
obj 2

8. Accounting for Intercompany Bonds
Year of Intercompany Bond Purchase - EE’s
Bonds payable 300,000
Investment in S Bonds ,000
To eliminate intercompany bond investment and liability
obj 2

9. Intercompany Bonds Cost and Partial Equity Methods
Year After Intercompany Bond Purchase - EE’s
Beginning retained earnings- P 10,000
Investment in S Bonds 10,000
(1) To record last year’s constructive loss not recorded by P and
(2) adjust the intercompany bond investment to par value
Beginning retained earnings- P 9,600
Beginning retained earnings- S 2,400
Discount on bonds payable 12,000
(1) To recognize the constructive loss not recorded by S and
(2) adjust the intercompany bonds to par value
obj 2

10. Intercompany Bonds Cost and Partial Equity Methods
Year After Intercompany Bond Purchase - EE’s
Investment in S Bonds 2,500
Interest revenue 2,500
To reverse amortization of premium recorded by P in the current year
Discount on bonds payable 3,000
Interest expense 3,000
To reverse amortization of discount recorded by S in the current year
obj 2

11. Intercompany Bonds Cost and Partial Equity Methods
Year After Intercompany Bond Purchase - EE’s
Interest revenue ,000
Interest expense ,000
To eliminate intercompany bond interest
Bonds payable ,000
Investment in S Bonds ,000
To eliminate intercompany bond investment and liability
obj 2

12. Intercompany Bonds Complete Equity Method
Year After Intercompany Bond Purchase - EE’s
Investment in S ,600
Beginning retained earnings- S ,400
Discount on bonds payable 12,000
Investment in S Bonds 10,000
(1) To record last year’s constructive loss not recorded by
P or S and
(2) adjust the intercompany bond investment to par value
obj 2

13. Intercompany Bonds Complete Equity Method
Year After Intercompany Bond Purchase - EE’s
Investment in S Bonds 2,500
Interest revenue 2,500
To reverse amortization of premium recorded by P in the current year
Discount on bonds payable 3,000
Interest expense 3,000
To reverse amortization of discount recorded by S in the current year
obj 2

14. Intercompany Bonds Complete Equity Method
Year After Intercompany Bond Purchase - EE’s
Bonds payable ,000
Investment in S Bonds ,000
To eliminate intercompany bond investment and liability
Interest revenue ,000
Interest expense ,000
To eliminate intercompany bond interest
obj 2

15. Intercompany Bonds Consolidated NI-Year after Bond Purchase
Reported income of P
Dividend income
Constructive loss recorded by P in the current year (premium amortization)
P’s contribution to combined income
Reported NI of S
+ Constructive loss recorded
by S in the current year
(discount amortization)
Adjusted NI of S x P%
Consolidated net income
obj 2

16. Notes Receivable Discounted
Subsidiary
Issues $100,000 note
Parent
Company
Discount note with bank
If S credits notes receivable upon discounting the note,
no adjustment is needed in consolidation.
If S credits notes receivable discounted upon discounting the note, an adjustment is needed in consolidation:
Dr Notes receivable discounted
Cr Notes receivable
obj 3

17. Notes Receivable Discounted
Subsidiary
Issues $100,000 note
Parent
Company
Discount note with bank
Receives note from third party
If P and S credits notes receivable upon discounting the note,
no adjustment is needed in consolidation.
If P or S credits notes receivable discounted upon discounting the note, an adjustment is needed in consolidation:
Dr Notes receivable discounted
Cr Notes receivable
obj 3

18. Stock Dividend from Subsidiary Journal Entries
Stock dividend declared (or R/E) 150,000
Capital stock ,000
Parent
Memorandum entry only.
obj 4

19. Stock Dividend from Subsidiary Eliminating Entries
Year of stock dividend
Capital stock ,000
Stock dividend declared (or R/E) 150,000
To reverse the subsidiary’s JE on stock dividend
obj 4

20. Dividends on Subsidiary Stock Stock vs. Cash
Cash Dividends – considered to be from current earnings. Reduce undistributed profits by this amount.
Stock Dividends – considered to be from earliest retained earnings balances. Reduce retained earnings balance at date of acquisition.
obj 5

21. Large Stock Distribution from Subsidiary Preacquisition Earnings
Sub issues 1,500 shares of stock (30%) as a dividend. Par value is $100.
Stock Dividend Declared
or Retained Earnings $150,000
Capital Stock ($1,500 shares x $100) $150,000
If this was a small (<20-25%) dividend the entry would be recorded at market rather than par.
obj 6

22. Stock Distribution Parent & Consolidated Preacquisition Earnings
Parent makes a memorandum entry only when the dividend is declared and paid.
Total equity after consolidation is not changed by a stock distribution.
obj 6

23. Subsidiary with Preferred Stock
Book value of net assets
Less: allocated to preferred stock par value
+ call premium
+ dividends in arrears
= residual allocated to common stock
obj 7

24. Subsidiary with Preferred Stock
Noncontrolling
interest
Common stock
not held
by parent
Common stock
held
by parent
Preferred stock
not held
by parent
Preferred stock
held
by parent
Controlling
interest
obj 7, 8

25. Subsidiary with Preferred Stock
Controlling Interest in Net Income
Reported income of P
Dividend income
Other adjustments
P’s contribution to combined income
P’s share of S adjusted income
Consolidated net income
Adjusted NI of S assigned to preferred stock x (P’s preferred stock %)
+ Adjusted NI of S assigned to common stock x (P’s common stock %)
obj 7,8

26. Advanced Accounting by Debra Jeter and Paul Chaney
Copyright © 2003 John Wiley & Sons, Inc. All rights reserved.
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