Solution manual advanced accounting 4e jeter ch09

To download more slides, ebook, solutions and test bank, visit

CHAPTER 9
ANSWERS TO QUESTIONS
1.

Constructive retirement refers to the purchase of an affiliate's outstanding bonds from outsiders.
From a consolidated entity viewpoint, the consolidated entity has retired its outstanding debt, and
is thus treated as an early extinguishment of debt. The difference between the carrying value of the
bonds and the purchase price to the purchasing affiliate is the constructive gain or loss on bond
retirement.

2.

The gain or loss is composed of two elements: (1) the discount or premium on the books of the
issuer, and (2) the discount or premium paid by the purchaser. Discounts and/or premiums on the
books of the two affiliates will be subsequently amortized to income. The cumulative effect on
income of the amortization of the discount or premium by the two affiliates is equal to the
constructive gain or loss.

3.

The allocation of a gain or loss would be made to each affiliate based on whether the affiliate paid
or issued the bonds for more or less than book value or par value. A discount (premium) to the
issuer would be allocated to the issuing company as a loss (gain), whereas a discount (premium) to
the purchasing affiliate would be a gain (loss). The sum of the two is the total constructive gain or
loss.

4.

Support for allocating the total gain or loss to the issuing company is based on the contention that

the purchasing affiliate is acting as an agent for the issuing company. Since both companies are
under the control of the management of the parent company, the bonds could be transferred to the
issuing company. Thus, the purchase is in substance a retirement by the issuing company.

5.

The noncontrolling interest is affected by the portion of the constructive gain or loss allocated to
the subsidiary. Because the loss is recognized in the consolidated income statement in the year the
bonds are purchased, a discount or premium amortization related to bonds that is made subsequent
to the purchase is added back or is subtracted from the subsidiary's reported income. Such
adjustments will increase or decrease the noncontrolling interest in the income of the subsidiary.

6.

a. Investor Company
Purchase price
Par value
Constructive gain

$338,000
350,000
$ 12,000

b. Investee Company
Carrying value
Par value
Constructive gain

$360,000
350,000

$ 10,000

7.

The outside party (the maker of the note) is primarily liable; and Affiliate Y, who discounted the
note with an outside party, is contingently liable for it.

8.

Stock dividends are viewed as a distribution of the earliest earnings accumulated in the retained
earnings account.

9.

The retained earnings balance at the date of acquisition is reduced since the issuance of a stock
dividend is viewed as a distribution of the earliest earnings accumulated.

9-1


To download more slides, ebook, solutions and test bank, visit

10. A memorandum entry is required to recognize the number of shares received since a dividend in
stock is not considered income to the recipient.
11. In the year of declaration, one additional elimination entry is required to eliminate the effects of the
dividend. In subsequent periods the amounts of this entry are combined with the investment
elimination entry.
12. Preferred stock of a controlled corporation held by others not in the controlled group represents
noncontrolling interest in the controlled corporation. The rights of these shareholders depend on
the stock's preference; possibilities are an interest in net assets, earnings, and retained earnings of

the controlled corporation.
13. Excess of cost over book value is debited to Other Contributed Capital or to Retained Earnings;
excess of book value acquired over cost is credited to Other Contributed Capital.
14. The preferred stock's cumulative preference would increase the net loss allocable to the common
stockholders.
SOLUTIONS TO BUSINESS ETHICS CASE
The responsibility of the management of the company is to present accurately the financial
statements to the shareholders and investors. Accordingly if an error is detected in the books, it
should be rectified as soon as it is discovered so that shareholders and investors are not misled.
Intercompany sales are eliminated in the consolidating process. Failure to do so is a material
omission, particularly when the inventories in question have not been sold to outsiders but
remain in the inventories of the consolidated entity. You should not succumb to the pressure
exerted by the manager of the subsidiary.
SOLUTIONS TO EXERCISES
Exercise 9-1
Part A

Part B

Cost of bond investment
Par value
Unamortized discount ($60,000 (16/20))
Carrying value of bonds
Percent of bonds purchased
Carrying value of bonds purchased
Total constructive loss

$820,000
$1,000,000
48,000

952,000
.80
761,600
$58,400

Pacelli Company

Salez Company

Carrying value of bonds purchased $761,600
Par value
800,000
Constructive loss
$ 38,400

Cost of bond investment
Par value of bonds purchased
Constructive loss

9-2

$820,000
800,000
$ 20,000


To download more slides, ebook, solutions and test bank, visit

Part C June 30 and December 31, 2012
Pacelli Company

Interest Expense (10%)(1/2)($1,000,000)
Cash

50,000
50,000

Interest Expense
Discount on Bonds Payable
$60,000 / 20 interest periods = $3,000

3,000
3,000

Salez Company
Cash
Interest Income ($800,000)(1/2)(10%)

40,000
40,000

Interest Income
Investment in Pacelli Company Bonds
$20,000 premium /16 periods = $1,250

1,250
1,250

Part D
Note: We have provided solutions assuming the use of any of the three methods. Since
the schedules start with the same reported income of Pacelli under all three methods, this

results in three different consolidated net income numbers.
2011

Partial
Complete
Cost Method Equity Method Equity Method
$260,000
$260,000
$260,000
48,000
112,000

Reported net income - Pacelli
Less: Dividend income ($60,000)(.80)
Less: Equity Income ($140,000)(.80)
Less: Adjusted Equity Income
($112,000-38,400-(80% of 20,000))
Net income from independent operations - Pacelli
212,000
Less: Constructive loss on bond retirement
38,400
Pacelli's contribution to consolidated income
173,600
Reported net income of Salez
$140,000
Less: Constructive loss on bond retirement 20,000
Salez's contribution to consolidated income 120,000
.80 96,000
Controlling interest in consolidated net income
$269,600

Noncontrolling interest in consolidated income
($120,000 .20)
$24,000

9-3

148,000
38,400
109,600

57,600
202,400
38,400
164,000

96,000
$205,600

96,000
$260,000

$24,000

$24,000


To download more slides, ebook, solutions and test bank, visit

Exercise 9-1 (continued)
Partial

Complete
Cost Method Equity Method Equity Method
$280,000
$280,000
$280,000
48,000
152,000

2012
Reported net income - Pacelli
Less: Dividend income ($60,000)(.80)
Less: Equity income ($190,000)(.80)
Less: Adjusted Equity income
($152,000 + $4,800 + (.80 $
Net income from independent operations - Pacelli
232,000
Add: Constructive loss recorded*
4,800
Pacelli's contribution to consolidated income
236,800
Reported net income of Salez
$190,000
Add: Constructive loss recorded**
2,500
Salez's contribution to consolidated income 192,500
0.80 154,000
Controlling interest in consolidated net income
$390,800
Noncontrolling interest in consolidated income
($192,500 .20)

$38,500

128,000
4,800
132,800

158,800
121,200
4,800
126,000

154,000
$286,800

154,000
$280,000

$38,500

$38,500

*($3,000
.80) = $4,800 or constructive loss divided by 8 years = $38,400/8 years = $4,800
** Constructive loss divided by 8 years = $20,000/8 = $2,500
Exercise 9-2
December 31, 2011
Cost and Partial Equity
38,400
38,400

Loss on Constructive Retirement of Bonds
Discount on Bonds Payable
Loss on Constructive Retirement of Bonds
Investment in Pacelli Company Bonds

20,000

Bonds Payable
Investment in Pacelli Company Bonds

800,000

Complete Equity
38,400
38,400
20,000

20,000

20,000
800,000

800,000

800,000

December 31, 2012
Beginning Retained Earnings - Pacelli Company
Discount on Bonds Payable

38,400
38,400

Investment in Salez
Discount on Bonds Payable
Discount on Bonds Payable
Interest Expense (($3,000 + $3,000)

38,400
38,400
4,800
.80)

4,800
4,800

9-4

4,800


To download more slides, ebook, solutions and test bank, visit

Exercise 9-2 (continued)
Cost and Partial Equity
16,000
4,000
20,000

Beginning Retained Earnings - Pacelli
Noncontrolling Interest
Investment in Pacelli Company Bonds
Investment in Salez
Noncontrolling Interest
Investment in Pacelli Company Bonds

16,000
4,000
20,000

Investment in Pacelli Company Bonds
Interest Income ($1,250 + $1,250)
Interest Income
Interest Expense
Nominal interest of $100,000

Complete Equity

2,500

2,500
2,500

80,000

2,500
80,000

80,000

80,000

.80 = $80,000

Bonds Payable
Investment in Pacelli Company

800,000

800,000
800,000

800,000

December 31, 2013
Cost and Partial Equity
38,400
38,400

Beginning Retained Earnings - Pacelli
Discount on Bonds Payable
Discount on Bonds Payable
Beginning Retained Earnings - Pacelli
Interest Expense (($3,000 + $3,000) .80)

9,600
4,800
4,800

Investment in Salez
Discount on Bonds Payable
Discount on Bonds Payable
Investment in Salez
Interest Expense (($3,000 + $3,000)

Complete Equity

38,400
38,400
9,600
4,800
4,800

.80)

Beginning Retained Earnings - Pacelli
–Noncontrolling Interest
Investment in Pacelli Company Bonds

16,000
4,000

Investment in Pacelli Company Bonds
Beginning Retained Earnings - Pacelli
Noncontrolling Interest
Interest Income ($1,250 + $1,250)

5,000

20,000
2,000
500
2,500

9-5


To download more slides, ebook, solutions and test bank, visit

Exercise 9-2 (continued)
Cost and Partial Equity
Investment in Salez
Noncontrolling Interest
Investment in Pacelli Company Bonds

Complete Equity
16,000
4,000
20,000

Investment in Pacelli Company Bonds
Investment in Salez
Noncontrolling Interest
Interest Income ($1,250 + $1,250)
Interest Income
Interest Expense
Nominal interest of $100,000

5,000

2,000
500
2,500
80,000

80,000
80,000

80,000

.80 = $80,000

Bonds Payable
Investment in Pacelli Company

800,000

800,000
800,000

800,000

Exercise 9-3
Part A Cost of bond investment ($510,000 .90)
Par value
Unamortized premium ($42,500
)
Carrying value of bonds
Percent of bonds purchased (510/850)
Carrying value of bonds purchased

Total constructive gain
Part B Fairfield Company
Cost of bond investment
Par value
Constructive gain

$459,000
$850,000
34,000
884,000
.60
530,400
$71,400

$459,000
510,000
$ 51,000

Weber Company
Carrying value of bonds purchased
Par value
Constructive gain

$530,400
510,000
$ 20,400

Part C June 30 and December 31, 2012
Fairfield Company
Cash ($510,000

.10

6
)
12

25,500

Interest Income

25,500

Investment in Weber Company Bonds
Interest Income
$51,000 / 8 periods = $6,375

6,375
6,375

9-6


To download more slides, ebook, solutions and test bank, visit

Exercise 9-3 (continued)
Weber Company
Interest Expense
Cash ($850,000

42,500
.10

6
)
12

42,500

Premium on Bonds
Interest Expense
$34,000 / 8 periods = $4,250

4,250
4,250

Part D
Note: We have provided solutions assuming the use of any of the three methods. Since
the schedules start with the same reported income of Fairfield under all three methods, this
results in three different consolidated net income numbers.
2011
Reported net income - Fairfield
Less: Dividend income ($60,000 .90)
Less: Equity income ($190,000)(.90)
Less: Adjusted Equity income
(171,000+51,000 + .9(20,400))
Net income from independent operations – Fairfield
Add: Constructive gain on bond retirement
Fairfield's contribution to consolidated income
Reported net income - Weber

$190,000
Add: Constructive gain on bond retirement
20,400
Weber's contribution to consolidated income 210,400
.90
Controlling interest in consolidated net income
Noncontrolling interest in consolidated income
($210,400 .10)

9-7

Partial
Complete
Cost Method Equity Method Equity Method
$275,000
$275,000
$275,000
54,000
171,000
221,000
51,000
272,000

104,000
51,000
155,000

240,360
34,640
51,000

85,640

189,360
$461,360

189,360
$344,360

189,360
$275,000

$21,040

$21,040

$21,040


To download more slides, ebook, solutions and test bank, visit

Exercise 9-3 (continued)
2012
Reported net income - Fairfield
Less: Dividend income ($80,000 .90)
Less Equity income ($225,000)(.90)
Less: Adjusted Equity income
($202,500 - $12,750 - (.9)5,100)
Net income from independent operations - Fairfield
Less: Constructive gain recorded*
Fairfield's contribution to consolidated income

Reported net income - Weber
$225,000
Less: Constructive gain recorded**
5,100
Weber's contribution to consolidated income 219,900
.90
Controlling interest in consolidated net income

Partial
Complete
Cost Method Equity Method Equity Method
$350,000
$350,000
$350,000
72,000
202,500
278,000
12,750
265,250

147,500
12,750
134,750

185,160
164,840
12,750
152,090

197,910

$463,160

197,910
$332,660

197,910
$350,000

$21,990

$21,990

$21,990

Noncontrolling interest in consolidated income
($219,900 .10)
* $6,375

2 = $12,750 or $51,000/4 periods = $12,750

**$4,250

.60 = $2,550; $2,550

2 = $5,100

Exercise 9-4
December 31, 2011
Premium on Bonds Payable ($34,000 .60)
Constructive Gain on Bond Retirement

Cost and Partial Equity
20,400
20,400

Investment in Weber Company Bonds
Constructive Gain on Bond Retirement

51,000

Bonds Payable
Investment in Weber Company Bonds

510,000

Complete Equity
20,400
20,400
51,000

51,000
510,000
510,000

9-8

51,000
510,000

To download more slides, ebook, solutions and test bank, visit

Exercise 9-4 (continued)
December 31, 2012
Investment in Weber Co. Bonds
Beginning Retained Earnings - Fairfield

Cost and Partial Equity
51,000
51,000

Investment in Weber Co. Bonds
Investment in Weber Co. Stock

51,000
51,000

Interest Income ($6,375
Investment in Weber Company Bonds

12,750

Premium on Bonds Payable
Beginning Retained Earnings - Fairfield
Noncontrolling Interest

20,400

12,750
12,750

12,750

18,360
2,040

Premium on Bonds Payable
Investment in Weber Co. Stock
Noncontrolling Interest

20,400
18,360
2,040

Interest Expense (($4,250 2) .60)
Premium on Bonds Payable

5,100

5,100
5,100

Interest Income
Interest Expense
Bonds Payable
Investment in Weber Company Bonds

Complete Equity

51,000

5,100
51,000

51,000
510,000

510,000
510,000

9-9

51,000
510,000


To download more slides, ebook, solutions and test bank, visit

Exercise 9-4 (continued)
December 31, 2013
Investment in Weber Co. Bonds
Beginning Retained Earnings - Fairfield

Cost and Partial Equity
51,000
51,000

Investment in Weber Co. Bonds
Investment in Weber Co. Stock

51,000
51,000

Beginning Retained Earnings – Fairfield
Interest Income ($6,375
Investment in Weber Company Bonds

12,750
12,750

12,750
25,500

Investment in Weber Co. Stock
Interest Income ($6,375
Investment in Weber Company Bonds

12,750
12,750
12,750
25,500

Premium on Bonds Payable
Beginning Retained Earnings - Fairfield
Noncontrolling Interest

20,400
18,360
2,040

Premium on Bonds Payable
Investment in Weber Co. Stock
Noncontrolling Interest

20,400
18,360
2,040

Beginning Retained Earnings – Fairfield
Noncontrolling Interest
Interest Expense (($4,250 2) .60)
Premium on Bonds Payable

4,590
510
5,100
10,200

Investment in Weber Co. Stock
Noncontrolling Interest
Interest Expense (($4,250 2) .60)
Premium on Bonds Payable

4,590
510
5,100
10,200

Interest Income
Interest Expense

Bonds Payable
Investment in Weber Company Bonds

Complete Equity

51,000

51,000
51,000

510,000

510,000
510,000

9 - 10

51,000
510,000


To download more slides, ebook, solutions and test bank, visit

Exercise 9-5
1.

2.

Carrying value of debt - 1/2/2011
Less: Premium amortization - (($5,000/20)

Carrying value of debt - 12/31/2011
Stated interest (30% of $500,000 .11)
Add: Discount amortization (($10,000/20)
Interest revenue

3.

Stated interest ($500,000 .11)
Less: Premium amortization ($5,000/20)(2)
Interest expense

4.

Cost of bond investment (1/2/2011)
Add: Discount amortization *
Investment account balance - 12/31/2011

* $500,000 par

2 periods)

$505,000
500
$504,500

2 periods)

$16,500
1,000
$17,500

$55,000
500
$54,500
$140,000
1,000
$141,000

30% less $140,000 paid divided by 10 years = $1,000

9 - 11


To download more slides, ebook, solutions and test bank, visit

Exercise 9-5 (continued)
5.

Reported net income - Peoples
Less: Dividend income ($90,000 .80)
Independent net income
Add: Constructive gain on bond retirement
Less: Constructive gain recorded during year
Contribution of Peoples to consolidated income
Reported net income - Schmidt
Less: amortization of difference between implied and
book value - COGS
Add: Constructive gain on bond retirement
($505,000 - $500,000) .30 =
Less: Constructive gain recorded during year
Income after adjustment for constructive gain

$300,000
72,000
228,000
10,000
(1,000)
237,000
$320,000
(60,000)
1,500
(150)
261,350
.80

Parent's share of adjusted income
Controlling interest in consolidated net income

209,080
$446,080

Computation and Allocation of Difference between Implied and Book Value Acquired
Parent
Share
Purchase price and implied value
Less: Book value of equity acquired:

$900,000
800,000

Difference between implied and book value

Allocated to inventory
Balance
Goodwill
Balance

6.

100,000
(48,000)
52,000
(52,000)
-0-

Noncontrolling interest in consolidated income

$261,350

NonEntire
Controlling
Value
Share
225,000 1,125,000
200,000 1,000,000
25,000
(12,000)
13,000
(13,000)
-0-

125,000

(60,000)
65,000
(65,000)
-0–

.20 = $52,270

Exercise 9-6
Part A Face (Par) value of note
Interest ($60,000 .12
Maturity value
Less: Discount ($61,800
Proceeds

)
.13

)

9 - 12

$60,000
1,800
61,800
1,339
$60,461


To download more slides, ebook, solutions and test bank, visit

Exercise 9-6 (continued)
Part B

Notes Receivable
Notes Receivable Discounted

Parent
Company
Dr (Cr)
60,000
(60,000)

Wyatt
Corporation
Dr (Cr)
60,000
(60,000)

*Elimination entry
Notes Receivable Discounted
Notes Receivable

Elimination
Consolidated
Entries
Balances
Debit Credit
Dr (Cr)
60,000*
60,000

60,000*
(60,000)

60,000
60,000

The results of the elimination entry is to show that the consolidated entity has a contingent liability for
$60,000.
Exercise 9-7
Part A Memorandum entry - Received a stock dividend of 1,050 shares of Salata Company common
stock (7,000 shares .15)
Part B Investment in Salata Company
Beginning Retained Earnings - Perez
($500,000 - $400,000) .70 = $70,000
Common Stock ((1,500 shares $100) .70)
Other Contributed Capital ((1,500 $60) .70)
Stock Dividend Declared
((10,000 shares .15 $160) .70 = $168,000)

70,000
70,000

105,000
63,000
168,000

Beginning Retained Earnings – Salata
500,000
Other Contributed Capital
100,000

Common Stock
1,000,000
Land (Difference between Implied and Book Value)
285,714
Investment in Salata Company ($1,250,000 + $70,000)
1,320,000
Noncontrolling interest [$535,714* + ($500,000 – 400,000) x .30]
565,714
* $1,250,000/.7 = $1,785,714 x .3 = $535,714
Part C Investment in Salata Company ($180,000 .70)
Beginning Retained Earnings - Perez
Retained earnings balance 1/1/2012
($500,000 + $80,000 - $240,000*)
Retained earnings balance - date of acquisition
Less: Stock dividend
Increase in retained earnings
* (($1,000,000/$100)

.15

$160)
9 - 13

126,000
126,000

$340,000
$400,000
240,000

160,000
$180,000


To download more slides, ebook, solutions and test bank, visit

Exercise 9-8
Part A 2011
Cash ($90,000 .90)
Investment in Swartz Corporation

81,000

2012
Cash ($40,000 .9)
Investment in Swartz Corporation

36,000

81,000

36,000

Part B Equity in Subsidiary Income ($65,000)(.90)
Investment in Swartz Corporation
Dividends Declared ($90,000 .90)

58,500
22,500
81,000

Common Stock - Swartz Corporation
Beginning Retained Earnings - Swartz Corporation
Difference between Implied and Book Value
Investment in Swartz Corporation
Noncontrolling interest

500,000
200,000
100,000

Land

100,000

720,000
80,000

Difference between Implied and Book Value
Part C Equity in Subsidiary Income ($80,000)(.90)
Investment in Swartz Corporation
Dividends Declared ($40,000 .90)

100,000
72,000
36,000
36,000

Retained earnings - 1/1/2013 ($200,000 + $65,000 - $90,000 + $80,000 - $40,000)

$215,000

Common Stock - Swartz Corporation
Beginning Retained Earnings - Swartz Corporation
Difference between Implied and Book Value
Investment in Swartz Corporation
Noncontrolling interest [$80,000 + ($215,000 – 200,000) x .10]

500,000
215,000
100,000
733,500
81,500

Land

100,000
Difference between Implied and Book Value

Cost of investment
Equity income (2011), .90 $65,000
Dividends (2011), .90 $90,000
Equity income (2012), .90 $80,000
Dividends (2012), .90 $90,000
Investment account

100,000

$720,000
58,500

(81,000)
72,000
(81,000)
$733,500

Part D 2011
Cash ($90,000 .90)
Dividend Income ($65,000 .90)
Investment in Swartz Corporation

81,000
58,500
22,500

9 - 14


To download more slides, ebook, solutions and test bank, visit

Exercise 9-8 (continued)
2012
Cash ($40,000 .9)
Dividend Income

36,000
36,000

Exercise 9-9
Part A
Cost Method

Investment in Sung Company Preferred Stock
Investment in Sung Company Common Stock
Cash

70,000
400,000
470,000

Cash (preferred stock)
Dividend Income ($200,000 12% 30%)
Investment in Sung Company Preferred Stock
($200,000 12% 30%)

14,400
7,200
7,200

Cash ($50,000 - $48,000) 80%)
Dividend Income (common stock)

1,600
1,600

Equity Method (complete and partial)
Investment in Sung Company Preferred Stock
Investment in Sung Company Common Stock
Cash

70,000
400,000

470,000

Cash (preferred stock)
Equity in Subsidiary Income –Preferred Stock
Investment in Sung Company Common Stock

14,400
7,200
7,200

Cash

1,600
Investment in Sung Company Common Stock

1,600

Investment in Sung Company Common Stock
Equity in Subsidiary Income ($90,000 – ($200,000

Arrears
Current year
Total
Percentage interest

Preferred
Stock
$24,000
24,000
48,000

.30
$14,400

9 - 15

52,800
.12))(.80)

Common
Stock
$2,000
2,000
.80
$1,600

52,800


To download more slides, ebook, solutions and test bank, visit

Exercise 9-9 (continued)
Part B Reported net income - 2011
Allocation to preferred stock interest ($200,000
Residual to common stock interest
Noncontrolling interest in 2011 net income

$90,000
.12) 24,000
$66,000

.70 =
.20 =

$16,800
13,200
$30,000

Part C
Cost Method
Investment in Sung Company Preferred Stock
Dividends Declared

7,200
7,200

Dividend Income
Dividends Declared

8,800
8,800

Beginning Retained Earnings - Sung Company
Preferred Stock
Other Contributed Capital (or Retained Earnings)
Investment in Sung Company Preferred Stock
Noncontrolling interest

24,000
200,000
9,333

70,000
163,333

Computation and Allocation of Difference between Implied and Book Value Acquired (Preferred)
Parent
Share
Purchase price and implied value
$70,000
Less: Book value of equity acquired
Preferred Stock
(60,000)
Retained Earnings (dividends in arears) (7,200)
Difference between implied and book value 2,800
Beginning Retained Earnings - Sung Company
($100,000 - $24,000)
Common Stock
Land (Difference between Implied and Book Value)*
Investment in Sung Company Common Stock
Noncontrolling interest
[$500,000 - $400,000 – ($100,000-$24,000)] = $24,000
Equity Method (complete and partial)
Investment in Sung Company Preferred Stock
Investment in Sung Company Common Stock
Dividends Declared – Preferred Stock
Equity in Subsidiary Income
Dividends declared – Common Stock
Investment in Sung Company Common Stock

9 - 16

NonControlling
Share
163,333

Entire
Value
233,333

(140,000)
(16,800)
6,533

(200,000)
(24,000)
9,333

76,000
400,000
24,000
400,000
100,000

7,200
7,200
14,400
52,800
1,600
51,200

To download more slides, ebook, solutions and test bank, visit

Exercise 9-9 (continued)
Beginning Retained Earnings - Sung Company
Preferred Stock
Other Contributed Capital (or Retained Earnings)
Investment in Sung Company Preferred Stock
Noncontrolling interest

24,000
200,000
9,333
70,000
163,333

Beginning Retained Earnings - Sung Company
($100,000 - $24,000)
Common Stock
Land (Difference between Implied and Book Value)
Investment in Sung Company Common Stock
Noncontrolling interest

76,000
400,000
24,000
400,000
100,000

Exercise 9-10
Case 1

2,000
40,000
13,000

Beginning Retained Earnings - Sam'sa
Preferred Stock
Other Contributed Capital*
Investment in Preferred Stock

Case 2
11,600
40,000
3,400
55,000

55,000

Case 3
9,000
40,000
6,000
55,000

* The difference between the implied value of the preferred stock investment and the book value
acquired is not allocated to specific assets or liabilities, but rather is accounted for as an equity
transaction and debited to Other Contributed Capital.
Beginning Retained Earnings - Sam'sa
Common Stock
Other Contributed Capital
Land (difference between

implied & book value)
Investment in Common Stock
Noncontrolling interest

105,000
500,000
160,000
151,667
550,000
366,667

81,000
500,000
160,000

87,500
500,000
160,000

175,667

169,167
550,000
366,667

550,000
366,667

aAllocation of Retained Earnings of $110,000:
Case 1

To Preferred Stock
$5,000
To Common Stock
105,000
$110,000

Case 2
$29,000
81,000
$110,000

Case 3
$22,500
87,500
$110,000

Par value
$100,000
Call premium
5,000
Dividends in arrears
Fully participating (1/6)(110-5)
______
Total
105,000
Par value
100,000
Retained earnings to preferred
5,000
Peterson’s percentate

40%
Beginning Retained Earnings – Sam’s 2,000

$100,000
5,000
24,000
______
129,000
100,000
29,000
40%
11,600

$100,000
5,000

9 - 17

17,500
122,500
100,000
22,500
40%
9,000


To download more slides, ebook, solutions and test bank, visit

Exercise 9-10 (continued)
Alternatively: $5,000 + ($100/$100+$500)

$500
$105,000 = $87,500
$600

$105,000 = $5,000 + $17,500 = $22,500;

Exercise 9-11
Cost Method
Case
Reported net income - Perez Co.
Less: Dividend incomea
Independent income
Perez Company's interest in net income of Serranob
Controlling interest in consolidated net income

1
$200,000
32,800
167,200
60,800
$228,000

2
3
4
$200,000 $200,000 $200,000
20,000
31,500
25,900
180,000 168,500 174,100

60,800
56,000
56,000
$240,800 $224,500 $230,100

a Computation of dividend income
Preferred Stock Common
Arrears*
Current
Stock
$8,000 $37,000
.4
.8
$3,200 $29,600

Case 1 – Noncumulative, nonparticipating
Current
Case 2 – Cumulative and nonparticipating
Arrears ($100,000 .08 2)
Current

$16,000
______
$16,000

$300,000

$21,000
21,000
.8

$16,800

$32,800
$16,000
29,000
$45,000
$20,000

Preferred Stock Common
Arrears*
Current
Stock
Total
(1)
$8,000 $24,000
$32,000

Case 3 – Noncumulative and fully participating
Current
Participating:
($100/$400) $13,000
($300/$400) $13,000

(1)

$8,000
8,000
.4
$3,200

Total
$45,000

3,250
______
$11,250
.4
$4,500

.08

9 - 18

9,750
$33,750
.8
$27,000

13,000
$45,000
$31,500


To download more slides, ebook, solutions and test bank, visit

Exercise 9-11 (continued)
Case 4 – Cumulative and fully participating
Arrears ($100,000 .08)
Current
Participating:

($100/$400) $5,000
($300/$400) $5,000

$8,000

_____
$8,000

$8,000

$24,000

1,250
_____
9,250
.4
$3,700

3,750
27,750
.8
$22,200

*Dividends in arrears at date of acquisition are accounted for as a liquidating dividend.
b Allocation of reported net income of Serrano, $80,000
Cases 1 and 2

Preferred Stock
Common Stock ($80,000 - $8,000)
Total

Cases 3 and 4
Current year
Participating
($100/$400) $48,000
($300/$400) $48,000

Preferred
Stock
$8,000

Common
Stock
$24,000

12,000
_____
20,000
.4
$8,000

36,000
60,000
.8
$48,000

9 - 19

$8,000
$72,000

.4 =
.8 =

Total
$32,000

48,000
$80,000
$56,000

$3,200
57,600
$60,800

$8,000
32,000

5,000
$45,000
$25,900


To download more slides, ebook, solutions and test bank, visit

Exercise 9-12
Part A

Part B

Cost of bond investment
Par value
Unamortized discount
Carrying value of bonds
Percent of bonds purchased
Carrying value of bonds purchased (rounded up)
Total constructive loss
Pacman Company
Carrying value of bonds purchased
Par value
Constructive loss

$77,362
$100,000
6,462
93,537
.80
74,830
$2,532
Space Invaders Company

$74,830
80,000
$ 5,170

Cost of bond investment
Par value of bonds purchased
Constructive gain

Part C July 1 and January, 2012

Pacman Company’s amortization schedule
(a)
(b)
Date
Interest
Cash
Expense
Payment
(10%)
12/31/2009
6/30/2010
4,614
4,000
12/31/2010
4,645
4,000
6/30/2011
4,677
4,000
12/31/2011
4,711
4,000
6/30/2012
4,746
4,000
12/31/2012
4,783
4,000
6/30/2013
4,823

4,000
12/31/2013
4,864
4,000
6/30/2014
4,907
4,000
12/31/2014
4,952
4,000

(c)
Discount
Amortization
(a-b)
614
645
677
711
746
783
823
864
907
952

9 - 20

(d)
Carrying value

(on Balance
Sheet)
$ 92,278
92,892
93,537
94,214
94,925
95,671
96,454
97,277
98,141
99,048
100,000

$77,362
80,000
$ 2,638


To download more slides, ebook, solutions and test bank, visit

Exercise 9-12 (continued)
Space Invaders Company’s amortization schedule
(a)
(b)
(c)
Date
Interest
Cash
Premium

Income
Receipt
Amortization
12/31/2010
6/30/2011
12/31/2011
6/30/2012
12/31/2012
6/30/2013
12/31/2013
6/30/2014
12/31/2014

3,481
3,494
3,507
3,521
3,535
3,551
3,566
3,583

3,200
3,200
3,200
3,200
3,200
3,200
3,200
3,200

281
294
307
321
335
351
366
383

June 30, 2011
Pacman Company
Interest Expense
Cash

(d)
Carrying value
(on Balance
Sheet)
77,362
77,643
77,937
78,244
78,565
78,900
79,251
79,617
80,000

4,000

4,000

Interest Expense
Discount on Bonds Payable

677
677

Space Invaders Company
Cash
Interest Income ($80,000)(1/2)(8%) or (0.80)(4,000)
Investment in Pacman Company Bonds
Interest Income

3,200
3,200
281
281

December 31, 2011
Pacman Company
Interest Expense
Cash

4,000
4,000

Interest Expense
Discount on Bonds Payable

711
711

Space Invaders Company
Cash
Interest Income ($80,000)(1/2)(8%) or (0.80)(4,000)
Interest Income
Investment in Pacman Company Bonds
9 - 21

3,200
3,200
294
294


To download more slides, ebook, solutions and test bank, visit

Exercise 9-12 (continued)
Part D
Note: We have provided solutions assuming the use of any of the three methods.
2010

Partial
Complete
Cost Method Equity Method Equity Method
$260,000
$316,000
$312,677
-42,000

-98,000

Reported net income - Pacman
Less: Dividend income ($60,000)(.70)
Less: Equity Income ($140,000)(.70)
Less: Adjusted Equity Income
($98,000 - 5,170 + (70% of 2,638))
Net income from independent operations - Pacman 218,000
Less: Constructive loss on bond retirement
-5,170
Pacman contribution to consolidated income
212,830
Reported net income of Space Invaders
$140,000
Add: Constructive gain on bond retirement
2,638
Space Invaders contribution
to consolidated income
142,638
.70 99,847
Controlling interest in consolidated net income
$312,677
Noncontrolling interest in consolidated income
($142,638 .30)
$42,791

9 - 22

218,000
-5,170

212,830

-94,677
218,000
-5,970
212,830

99,847
$312,677

99,847
$312,677

$42,791

$42,791


To download more slides, ebook, solutions and test bank, visit

Partial
Complete
Cost Method Equity Method Equity Method
$280,000
$371,000
$371,708
-42,000
-133,000

2011

Reported net income - Pacman
Less: Dividend income ($60,000)(.70)
Less: Equity income ($190,000)(.70)
Less: Adjusted Equity income
($133,000 + ($677 +711)
- (.70 281+294)))
Net income from independent operations - Pacman 238,000
Add: Constructive loss recorded* (677+711)
1,110
Pacman contribution to consolidated income
239,388
Reported net income of Space Invaders
$190,000
Less: Constructive gain recorded**
575
Space Invaders contribution to
consolidated income
189,425
0.70 132,598
Controlling interest in consolidated net income
$371,708
Noncontrolling interest in consolidated income
($189,425 .30)
* discount amortized ($677+711)
** discount amortized (281+294)

9 - 23

$56,828

238,000
1, 110
239,388

-133,708
238,000
1, 110
239,388

132,598
$371,708

132,598
$371,708

$56,828

$56,828


To download more slides, ebook, solutions and test bank, visit

Exercise 9-13
December 31, 2010
Cost and Partial Equity
5,170
5,170

Loss on Constructive Retirement of Bonds
Discount on Bonds Payable

Investment in Pacman Company Bonds
Gain on Constructive Retirement of Bonds

2,638

Complete Equity
5,170
5,170
2,638

2,638

Bonds Payable
Investment in Pacman Company Bonds

80,000

2,638
80,000

80,000

80,000

December 31, 2011
Beginning Retained Earnings - Pacman Company
Discount on Bonds Payable

Cost and Partial Equity
5,170

5,170

Investment in Space Invaders
Discount on Bonds Payable
Discount on Bonds Payable
Interest Expense (($677 + $711)

Complete Equity

5,170
5,170
1,110
.80)

1,110
1,110

Beginning Retained Earnings – Pacman (70%)
Noncontrolling Interest (30%)
Investment in Pacman Company Bonds

1,110

1,847
791
2,638

Investment in Space Invaders (70%)
Noncontrolling Interest (30%)
Investment in Pacman Company Bonds

1,847
791
2,638

Investment in Pacman Company Bonds
Interest Income ($281 + $294)

575

575
575

Interest Income (intercompany interest)
Interest Expense
Nominal interest of $8,000
.80 = $6,400
Bonds Payable
Investment in Pacman Company

6,400

6,400
6,400

80,000

6,400
80,000

80,000

9 - 24

575

80,000


To download more slides, ebook, solutions and test bank, visit

December 31, 2012
Cost and Partial Equity
5,170
5,170

Beginning Retained Earnings - Pacman
Discount on Bonds Payable
Discount on Bonds Payable
Beginning Retained Earnings - Pacman
Interest Expense ((746 + 783)
.80)

Complete Equity

2,333
1,110
1,223

Investment in Space Invaders

Discount on Bonds Payable

5,170

Discount on Bonds Payable
Investment in Space Invaders
Interest Expense ((746 + 783)

2,333

5,170
1,110
1,223

.80)

Investment in Pacman Company Bonds
Beginning Retained Earnings – Pacman (70%)
Noncontrolling Interest (30%)

2,638

Beginning Retained Earnings - Pacman
Noncontrolling Interest
Interest Income ($307 + $321)
Investment in Pacman Company Bonds

402.5
172.5
628.0

1,847
791

1,203

Investment in Pacman Company Bonds
Beginning Retained Earnings – Pacman (70%)
Noncontrolling Interest (30%)

2,638

Beginning Retained Earnings - Pacman
Noncontrolling Interest
Interest Income ($307 + $321)
Investment in Pacman Company Bonds

402.5
172.5
628.0

Interest Income
Interest Expense
Nominal interest of $8,000

1,847
791

1,203
6,400

6,400
6,400

6,400

.80 = $6,400

Bonds Payable
Investment in Pacman Company

80,000

80,000
80,000

9 - 25

80,000