Slide AKT 307 AKL 1 8

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Intercompany

Indebtedness

8

Electronic Presentation by

Douglas Cloud

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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

inter-corporate debt transfer

(3)

Bonds of Affiliate Purchased from a

Nonaffiliate

(4)

Entry by PT Anak

(15) Jan. 1 Cash 102,000,000

Bonds Payable 100,000,000

Premium on Bonds Payable 2,000,000 Sale of bonds to Nonaffiliated.

purchased from PT Anak by PT Nonafiliasi.

PT Anak PT Nonafiliasi

(5)

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.

Bond Liability Entries--20X1

Rp2,000,000

÷ 20 interest

periods

Rp100,000,000

_{x .12 x 6/12}

(17)Dec. 31 Interest Expense

5,900,000

Premium on Bonds Payable

100,000

Cash

6,000,000

(6)

Cash

91,000,000

Purchase of PT Anak bonds

from PT Nonafiliasi.

This entry is the same as if the bonds purchased

were those of an unrelated company.

(7)

Constructive Debt Retirement-20X1

Computation of Gain on Constructive 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 gain or loss is assigned to the

issuing company.

(8)

Income from Subsidiary

40,000,000

Record equity-method income:

Rp50,000,000 x .80

(19) Cash

24,000,000

Investment in PT Anak Stock

24,000,000

Record dividends from PT Anak:

(9)

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

An entry is needed to eliminate the investment account

during 20X1, the parent’s share of the subsidiary’s net

Constructive Debt Retirement--20X1

(in ‘000)

Income from

Subsidiary 40,000

Dividends

Declared (60,000 (30,000)

Investment in PT Anak

Stock 256,000

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Income from

Subsidiary 40,000 40,000

Dividends

Declared (60,000 (30,000) 24,000

Stock 256,000 16,000

(11)

Noncontrolling Interest’s Share of Income

Net income of PT Anak

Rp50,000,000

Gain on constructive retirement of

bond

10,800,000

Realized net income of PT Anak

Rp60,800,000

Noncontrolling stockholders’ share x .20

Noncontrolling interest’s share

(12)

Income to

Noncontrolling Interest

Dividends

Declared (60,000) (30,000) (21) 24,000

Noncontrolling Interest

An entry is required eliminate the income from the subsidiary.

(13)

Income to

Noncontrolling

Interest (22) 12,160 (12,160)

Dividends

Declared (60,000) (30,000) (21) 24,000

(22) 6,000 (60,000)

Noncontrolling

Interest (22) 6,160

Constructive Debt Retirement--20X1

(in ‘000)

(14)

Retained

ings, Jan. 1 300,000 100,000 Investment in

PT Anak

Stock 256,000 (21) 16,000

Common Stock 500,000 200,000 Noncontrolling

Interest (22) 6,160

An entry is necessary to eliminate PT Induk’s investment account

and the stockholders’ equity balances of PT Anak at the

beginning of the year, and establish the amount of the

noncontrolling interest at the beginning of the year.

An entry is necessary to eliminate PT Induk’s investment account

and the stockholders’ equity balances of PT Anak at the

beginning of the year, and establish the amount of the

noncontrolling interest at the beginning of the year.

(15)

Retained

ings, Jan. 1 300,000 100,000 (23)100,000 300,000

Stock 256,000 (21) 16,000

(23) 240,000

Common Stock 500,000 200,000 (23)200,000 500,000

Noncontrolling

Interest 6,160

(23) 60,000 66,160

Constructive Debt Retirement--20X1

(in ‘000)

(16)

Totals Amounts

Bonds Payable -0- Rp(100,000,000) Rp(100,000,000) -0- Premium on

Bonds Payable -0- (1,800,000) (1,800,000) -0-

Investment

in Bonds Rp91,000,000 -0- 91,000,000 -0-

Interest Expense -0- Rp 11,800,000 Rp 11,800,000 Rp11,800,000

Interest Income -0- -0- -0- -0-

Gain on Bond

(17)

An entry is required to eliminate the

Gain on Bond Retirement

Bonds 91,000

Bonds Payable 200,000 100,000 Premium on

Bonds Payable 1,800

Constructive Debt Retirement--20X1

(in ‘000)

(18)

Gain on Bond

Retirement (24) 10,800 10,800

Bonds 91,000 (24) 91,000

Bonds Payable 200,000 100,000 (24)100,000 200,000

Premium on

(19)

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

x .80 48,640,000

Consolidated net income, 20X1

Rp188,640,000

Consolidated Net Income--20X1

(20)

Common stock

Rp200,000,000

Retained earnings

120,000,000

Total reported book value

Rp320,000,000

(21)

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.

Bond Liability Entries--20X2

Rp2,000,000

÷ 20 interest

periods

Rp100,000,000

_{x .12 x 6/12}

(26)Dec. 31 Interest Expense

5,900,000

Premium on Bonds Payable

100,000

Cash

6,000,000

(22)

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

6,500,000

Record receipt of Bond Interest.

Amortization of discount recorded per year: (Rp100,000,000 -

Rp91,000,000) / 9 = Rp1,000,000.

(23)

Subsequent Recognition of Gain

Bond

Carrying amount of bond investment Book value of

bond liability

Rp2,000,000

(24)

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

(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

Dividends

(Rp30,000,000 x .80) 24,000,000

Dividends

(26)

An entry is needed to eliminate the investment account

during 20X2, the parent’s share of the subsidiary’s net

income, and the dividends recognized during the year.

An entry is needed to eliminate the investment account

during 20X2, the parent’s share of the subsidiary’s net

income, and the dividends recognized during the year.

Income from

Subsidiary 60,000

Dividends

Declared (60,000 (40,000)

Stock 284,000

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Consolidation Workpaper--20X2

(in ‘000)

_{(in ‘000)}

Income from

Subsidiary 60,000 (31) 60,000

Dividends

Declared (60,000 (40,000) (31) 32,000

Stock 284,000 (31) 28,000

)

(28)

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

(200,000)

Realized net income of PT Anak

Rp73,800,000

Noncontrolling stockholders’ share x .20

Noncontrolling interest’s share

(29)

Income to

Consolidation Workpaper--20X2

(in ‘000)

_{(in ‘000)}

An entry is required eliminate the income from the subsidiary.

(30)

Income to

Noncontrolling

Interest (32) 14,760 (14,760)

Dividends

Declared (60,000) (40,000) (31) 32,000

(32) 8,000 (60,000)

Noncontrolling

(31)

Retained

ings, Jan. 1 420,000 120,000 Investment in

PT Anak

Stock 284,000 (21) 28,000

Common Stock 500,000 200,000 Noncontrolling

Interest (32) 6,760

An entry is necessary to eliminate PT Induk’s investment account

and the stockholders’ equity balances of PT Anak at the

An entry is necessary to eliminate PT Induk’s investment account

and the stockholders’ equity balances of PT Anak at the

Consolidation Workpaper--20X2

(in ‘000)

_{(in ‘000)}

(32)

Retained

ings, Jan. 1 420,000 120,000 (33)120,000 420,000

Stock 284,000 (31) 28,000

(33) 256,000

Common Stock 500,000 200,000 (33)200,000 500,000

Noncontrolling

Interest (32) 6,760

(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

92,000,000

Interest Expense

11,800,000

R/E, Jan 1

8,640,000

(34)

Interest Income 13,000

Interest Expense 20,000 11,800 Investment in

PT Anak

Bonds 92,000

Bonds Payable 200,000 100,000 Premium on

Bonds Payable 1,600

Noncontrolling

Interest (32) 6,760

(33) 4,000

An entry is required to eliminate intercompany holdings.

(35)

Retained

ings, Jan. 1 420,000 120,000 (33) 120,000 (34) 8,640 428,640

Interest Income 13,000 (34) 13,000

Interest Expense 20,000 11,800 (34) 11,800 20,000

Bonds 92,000 (34) 92,000

Bonds Payable 200,000 100,000 (34) 100,000 200,000

Premium on

Bonds Payable 1,600 (34) 1,600

Noncontrolling

Consolidation Workpaper--20X2

(in ‘000)

_{(in ‘000)}

(36)

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

x .80

59,040,000

(37)

Journal elimination for B/P – 20X3

Bonds Payable

100,000,000

Premium on B/P

1,400,000

Interest Income

13,000,000

(38)

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

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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

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