Chapter 08 – Intercompany Indebtedness
Chapter 08 Intercompany Indebtedness Answer Key
Multiple Choice Questions
1. Cutler Company owns 80 percent of the common stock of Marina Inc. Cutler acquires
some of Marina’s bonds from an unrelated party for less than the carrying value on Marina’s
books and holds them as a long-term investment. For consolidated reporting purposes, how is
the acquisition of Marina’s bonds treated?
A. As a decrease in the Bonds Payable account on Marina’s books.
B. As an increase in noncurrent assets.
C. Everything related to the bonds is eliminated in the consolidation worksheet, and nothing
related to the bonds appears in the consolidated financial statements.
D. As a retirement of bonds.
2. Culver owns 80 percent of the common stock of Fowler Company. Culver also purchases
some of Fowler’s bonds directly from Fowler and holds the bonds as a long-term investment.
How is the acquisition of the bonds treated for consolidated reporting purposes?
A. As a retirement of bonds.
B. As an increase in the Bonds Payable account on Fowler’s books.
C. Everything related to the bonds is eliminated in the consolidation worksheet, and nothing
related to the bonds appears in the consolidated financial statements.
D. As an increase in noncurrent assets.
3. At the end of the year, a parent acquires a wholly owned subsidiary’s bonds from
unaffiliated parties at a cost less than the subsidiary’s carrying value. The consolidated net
income for the year of acquisition should include the parent’s separate operating income plus:
A. the subsidiary’s net income increased by the gain on constructive retirement of debt.
B. the subsidiary’s net income decreased by the gain on constructive retirement of debt.
C. the subsidiary’s net income increased by the gain on constructive retirement of debt, and
decreased by the subsidiary’s bond interest expense.
D. the subsidiary’s net income decreased by the gain on constructive retirement of debt, and
decreased by the subsidiary’s bond interest expense.
4. A loss on the constructive retirement of a parent’s bonds by a subsidiary is effectively
recognized in the accounting records of the parent and its subsidiary:
I. at the date of constructive retirement.
II. over the remaining term of the bonds.
A. I
B. II
C. Both I and II
D. Neither I nor II
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Chapter 08 – Intercompany Indebtedness
5. When one company purchases the debt of an affiliate from an unrelated party, a gain or loss
on the constructive retirement of debt is recognized by which of the following?
A. Option A
B. Option B
C. Option C
D. Option D
6. Which of the following statements is (are) correct?
I. The amount assigned to the noncontrolling interest may be affected by a constructive
retirement of bonds.
II. A constructive retirement of bonds normally results in an extraordinary gain or loss.
III. In constructive retirement, the bonds are considered outstanding, even though they are
treated as if they were retired in preparing consolidated financial statements.
A. I
B. II
C. I and III
D. I, II, and III
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Chapter 08 – Intercompany Indebtedness
7. On January 1, 20X6, Nichols Corporation issued 10-year bonds at par to unrelated parties.
The bonds pay interest of $15,000 every June 30 and December 31. On December 31, 20X9,
Harn Corporation purchased all of Nichols’ bonds in the open market at a $6,000 discount.
Harn is Nichols’ 80 percent owned subsidiary. Harn uses the straight line method of
amortization. The consolidated income statement for the year 20X9 should report with respect
to the bonds:
I. interest expense of $30,000.
II. an extraordinary gain of $6,000.
A. I
B. II
C. Either I or II
D. Neither I nor II
Light Corporation owns 80 percent of Sound Company’s voting shares. On January 1, 20X7,
Sound sold bonds with a par value of $300,000 at 95. Light purchased $200,000 par value of
the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an
annual interest rate of 6 percent. Interest is paid semiannually on January 1 and July 1.
8. Based on the information given above, what amount of interest expense should be reported
in the 20X8 consolidated income statement?
A. $6,000
B. $6,500
C. $5,000
D. $10,000
9. Based on the information given above, what amount of interest receivable will be recorded
by Light Corporation on December 31, 20X8, in its separate financial statements?
A. $5,000
B. $6,500
C. $10,000
D. $6,000
10. Based on the information given above, what amount of interest expense will be eliminated
in the preparation of the 20X8 consolidated financial statements?
A. $13,000
B. $13,500
C. $10,000
D. $15,000
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Chapter 08 – Intercompany Indebtedness
Master Corporation owns 85 percent of Servant Corporation’s voting shares. On January 1,
20X8, Master Corporation sold $200,000 par value 8 percent bonds to Servant for $245,000.
The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.
11. Based on the information given above, in the preparation of the 20X8 consolidated
financial statements, premium on bonds payable will be:
A. debited for $45,000 in the eliminating entries.
B. credited for $40,500 in the eliminating entries.
C. debited for $40,500 in the eliminating entries.
D. credited for $45,000 in the eliminating entries.
12. Based on the information given above, in the preparation of the 20X8 consolidated
financial statements, interest income will be:
A. debited for $11,500 in the eliminating entries.
B. credited for $11,500 in the eliminating entries.
C. debited for $16,000 in the eliminating entries.
D. credited for $16,000 in the eliminating entries.
13. Based on the information given above, what amount of investment in bonds will be
eliminated in the preparation of the 20X8 consolidated financial statements?
A. $240,500
B. $200,000
C. $245,000
D. $211,500
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Chapter 08 – Intercompany Indebtedness
Moon Corporation issued $300,000 par value 10-year bonds at 107 on January 1, 20X3,
which Star Corporation purchased. On July 1, 20X7, Sun Corporation purchased $120,000 of
Moon bonds from Star. The bonds pay 12 percent interest annually on December 31. The
preparation of consolidated financial statements for Moon and Sun at December 31, 20X9,
required the following eliminating entry:
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Chapter 08 – Intercompany Indebtedness
14. Based on the information given above, what percentage of the subsidiary’s ownership does
the parent company hold?
A. 75 percent
B. 65 percent
C. 80 percent
D. 95 percent
15. Based on the information given above, what amount did Sun pay when it purchased the
bonds on July 1, 20X7?
A. $118,020
B. $118,920
C. $118,620
D. $117,220
16. Based on the information given above, what amount of gain or loss on bond retirement is
included in the 20X7 consolidated income statement?
A. $6,600
B. $4,800
C. $6,000
D. $5,400
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Chapter 08 – Intercompany Indebtedness
17. Based on the information given above, if 20X9 consolidated net income of $50,000 would
have been reported without the eliminating entry provided, what amount will actually be
reported?
A. $47,900
B. $48,200
C. $49,400
D. $48,800
ABC, a holder of a $400,000 XYZ Inc. bond, collected the interest due on June 30, 20X8,
and then sold the bond to DEF Inc. for $365,000. On that date, XYZ, a 90 percent owner of
DEF, had a $450,000 carrying amount for this bond.
18. Based on the information given above, what amount of gain or loss on bond retirement
was recorded?
A. No gain or loss
B. $85,000 gain
C. $85,000 loss
D. $35,000 loss
19. Based on the information given above, what was the effect of DEF’s purchase of XYZ’s
bond on the noncontrolling interest amount reported in XYZ’s June 30, 20X8, consolidated
balance sheet?
A. No effect
B. $35,000 increase
C. $8,500 decrease
D. $8,500 increase
.
Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at
105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.
Mortar Corporation purchased $140,000 of Granite’s bonds from the original purchaser on
December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite’s voting common
stock.
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Chapter 08 – Intercompany Indebtedness
20. Based on the information given above, what amount of premium on bonds payable will be
eliminated in the preparation of the 20X8 consolidated financial statements?
A. $3,500
B. $2,800
C. $5,000
D. $2,500
21. Based on the information given above, what amount of gain or loss on bond retirement
will be reported in the 20X8 consolidated financial statements?
A. $17,000 loss
B. $12,800 loss
C. $18,500 gain
D. $22,200 gain
22. Based on the information given above, what amount of premium on bonds payable will be
eliminated in the preparation of the 20X9 consolidated financial statements?
A. $3,500
B. $2,800
C. $5,000
D. $2,500
23. Based on the information given above, what amount of interest income will be eliminated
in the preparation of the 20X9 consolidated financial statements?
A. $17,000
B. $13,300
C. $18,500
D. $22,200
24. Based on the information given above, what amount of interest expense will be
eliminated in the preparation of the 20X9 consolidated financial statements?
A. $17,000
B. $13,300
C. $18,500
D. $22,200
AACSB: Analytic
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 08-03 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount less
than book value.
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Chapter 08 – Intercompany Indebtedness
25. Based on the information given above, what amount of constructive gain will be allocated
to noncontrolling interest in 20X8 consolidated financial statements?
A. $4,925
B. $5,550
C. $5,625
D. $4,625
AACSB: Analytic
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 08-03 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount less
than book value.
Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at
105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.
Mortar Corporation purchased $140,000 of Granite’s bonds from the original purchaser on
January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite’s voting common stock.
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Chapter 08 – Intercompany Indebtedness
26. Based on the information given above, what amount of premium on bonds payable will be
eliminated in the preparation of the 20X8 year-end consolidated financial statements?
A. $3,500
B. $2,800
C. $5,000
D. $2,500
27. Based on the information given above, what amount of gain or loss on bond retirement
will be reported in the 20X8 consolidated financial statements?
A. $17,000
B. $12,800
C. $18,500
D. $22,200
28. Based on the information given above, what amount of premium on bonds payable will be
eliminated in the preparation of the 20X9 year-end consolidated financial statements?
A. $3,500
B. $2,800
C. $5,000
D. $2,500
29. Based on the information given above, what amount of interest income will be eliminated
in the preparation of the 20X9 consolidated financial statements?
A. $17,000
B. $13,300
C. $18,500
D. $22,200
Hunter Corporation holds 80 percent of the voting shares of Moss Company. On January 1,
20X8, Moss purchased $100,000 par value 12 percent first mortgage bonds of Hunter from
Cruse for $115,000. Hunter originally issued the bonds to Cruse on January 1, 20X6, for
$110,000. The bonds have an 8-year maturity from the date of issue. Moss reported net
income of $65,000 for 20X8, and Hunter reported income (excluding income from ownership
of Moss’s stock) of $90,000.
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Chapter 08 – Intercompany Indebtedness
30. Based on the information given above, what amount of interest expense does Hunter
record annually?
A. $10,750
B. $9,500
C. $2,500
D. $12,000
31. Based on the information given above, what amount of interest income does Moss record
for 20X8?
A. $12,000
B. $2,500
C. $7,500
D. $9,500
32. Based on the information given above, what gain or loss on the retirement of bonds should
be reported in the 20X8 consolidated income statement?
A. $6,250 gain
B. $7,500 gain
C. $7,500 loss
D. $6,250 loss
33. Based on the information given above, what amount of consolidated net income should be
reported for 20X8?
A. $163,750
B. $161,250
C. $146,250
D. $148,750
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Chapter 08 – Intercompany Indebtedness
Senior Corporation acquired 80 percent of Junior Company’s voting shares on January 1,
20X8, at underlying book value. On that date, it also purchased $500,000 par value 8 percent
Junior bonds, which had been issued on January 1, 20X5, with a 12-year maturity. During
preparation of the consolidated financial statements for December 31, 20X8, the following
eliminating entry was made in the worksheet:
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Chapter 08 – Intercompany Indebtedness
34. Based on the information given above, what price did Senior pay to purchase the Junior
bonds?
A. $530,000
B. $516,875
C. $533,750
D. $550,625
35. Based on the information given above, what was the carrying amount of the bonds on
Junior’s books on the date of purchase?
A. $533,750
B. $516,875
C. $545,000
D. $550,625
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