Chapter 8

Silver Circuits Corporation issues $150,000 of bonds at 10% for 15 years to an affiliate company, Zinc Arts Corporation. Which of the following are included in the consolidation entries needed to eliminate intercompany interest?

Interest Expense is credited for $15,000. Interest Income is debited for $15,000.

An acquisition of an affiliate's bonds retires the bonds Blank______.

at the time of purchased

Which of the following are characteristics of constructive retirement?

- An acquisition of an affiliate's bonds is treated as if repurchased by the debtor. - The bonds no longer are held outside the consolidated entity once another company within the consolidated entity purchases them. - An acquisition of an affiliate's bonds is treated as if the bonds were retired for consolidation purposes.

Which of the following statements are true of an indirect intercompany debt transfer?

- It involves the issuance of debt to an unrelated party. - It leads to a debt retirement for the consolidated entity. - It involves a subsequent purchase of the debt instrument by an affiliate of the issuer.

Which of the following statements are true of constructive retirement?

- It is an acquisition of an affiliate's bonds by another company within the consolidated entity. - It is treated as if the bonds are retired for the purpose of preparing the consolidated financial statements. - The consolidated income statement for the period reports a gain or loss on debt retirement.

Which of the following accounts are involved in the consolidation entry recorded to eliminate intercorporate bond holdings in the year of the intercompany investment when there is a loss on the constructive retirement? Assume the purchase from the nonaffiliate took place at the end of the year, after interest had been paid.

- Loss on Bond Retirement - Investment in Investee Bonds - Bonds Payable

Which of the following statements are true of the consolidation entry recorded in the year of a constructive retirement of bonds to eliminate intercorporate bond holdings? Assume there was a loss on the constructive retirement.

- The entry recognizes the loss on the constructive retirement. - The entry eliminates the amount of bond investment from the consolidated statements. - The entry eliminates the amount of bonds payable from the consolidated statements.

Which of the following are true of the consolidated financial statements when a company purchases an affiliate's debt from an unrelated party at a price equal to the liability reported by the debtor?

- The interest expense reported by the debtor is eliminated in the consolidation process. - The interest income reported by the bondholder is eliminated in the consolidation process. - The premium or discount recorded by the debtor is eliminated in the consolidation process.

Which of the following are eliminated from the consolidated financial statements if a company sells bonds directly to an affiliate?

- The interest income on bonds - The unamortized discount on bonds - The amount invested in bonds

Identify the statements that are true about the purchase of an affiliate's debt from an unrelated party at a price equal to the liability reported by the debtor.

- The total of the bond liability and the related premium or discount reported by the debtor equal the balance in the investment account shown by the bond holder. - The interest income reported by the bond holder each period equals the interest expense reported by the debtor.

All of the following are examples of debt transfers. Which of these transactions are examples of indirect intercompany debt transfers?

- Violet Corporation purchases a debt instrument from Bronze Corporation. The debt instrument was originally issued by Lavender Corporation, an affiliate of Violet. - Amber Corporation borrows funds from Coral Corporation, a nonaffiliate company. The debt instrument is repurchased by Ruby Corporation, an affiliate of Amber.

Which of the following accounts are involved in the consolidation entry recorded to eliminate intercorporate bond holdings in the year of the intercompany investment when there is a loss on the constructive retirement? Assume the purchase from the nonaffiliate took place at the end of the year, after interest had been paid.

Bonds Payable Investment in Investee Bonds Loss on Bond Retirement

In 20X1, Ivory Parts Corporation purchased Pearl Arts Corporation's bonds from Ruby Systems Corporation, after interest had been paid, for $120,000. Ivory and Pearl are affiliates. Ruby had purchased the bonds from Pearl at their par value of $112,500. Record the consolidation entry in 20X1 to eliminate the intercorporate bond holdings.

Debit Bonds Payable for $112,500; Debit Loss on Bond Retirement for $7,500; Credit Investment in Pearl Arts Bonds for $120,000

Which of the following entries is recorded in the consolidation worksheet to eliminate intercorporate bond holdings?

Debit Bonds Payable; Credit Investment in Subsidiary Bonds

Which of the following is the issuer's journal entry to record the sale of bonds at a premium to a nonaffiliated company?

Debit Cash; Credit Bonds Payable; Credit Premium on Bonds Payable

Coral Controls Corporation issued bonds to Ruby Parts Corporation on January 1, 20X1. The face value of the bonds was $320,000, the stated rate was 10%, and interest is payable annually on December 31. On the issuance date, the market interest rate was 11%. In order to yield an 11% return, Coral Controls issued the bonds for $302,000. Which of the following is the journal entry to record the 20X1 interest payment on the issuer's books?

Debit Interest Expense for $33,220; Credit Discount on Bonds Payable for $1,220; Credit Cash for $32,000: Reason: Interest expense = $302,000 × 11% = $33,220; Interest paid = $320,000 × 10% = $32,000; Discount on bonds payable = $33,220 - $32,000 = $1,220.

Crocker Mills Corporation purchased 80% of Steamer Energy Corporation's common stock. Steamer issued 12-year, 8% bonds with a par value of $200,000. The bonds were issued to a nonaffiliated investor on January 1, 20X1, for $215,000. Interest is paid semi-annually on July 1 and January 1 and Steamer amortizes the bond premium using the straight-line method. Which of the following is the issuer's journal entry to record the first interest payment?

Debit Interest Expense for $7,375; Debit Premium on Bonds Payable for $625; Credit Cash for $8,000: Reason: Interest paid = $200,000 × 8% × 1/2 year = $8,000; Amortization of premium = ($15,000 ÷ 12) × 1/2 year = $625 Interest expense = $8,000 - $625 = $7,375.

Which of the following is the journal entry to record accrued interest expense on the bond issuer's books when the bonds are issued at a discount?

Debit Interest Expense; Credit Discount on Bonds Payable; Credit Interest Payable

A company issued bonds for less than face (par) value and received cash for the bonds issued. Which of the following accounts are involved in the journal entry to record the issuance of bonds on the issuer's books?

Discount on Bonds Payable Bonds Payable Cash

Which of the following accounts are credited on the issuer's books to record the issuance of bonds at a premium to a nonaffiliate?

Premium on Bonds Payable Bonds Payable

When one company sells bonds directly to an affiliate, all amounts associated with the intercompany indebtedness must be eliminated as the consolidated entity is viewed as a Blank______ company.

Single