Chapter9ed07

Chapter9ed07 - Chapter 7 Test Bank INTERCOMPANY PROFIT...

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Chapter 7 Test Bank INTERCOMPANY PROFIT TRANSACTIONS - BONDS Multiple Choice Questions LO1 1. The intercompany purchase of parent company bonds by a subsidiary has the same effect on the consolidated financial statements as the: a. purchase of the bonds by a non-affiliate. b. parent's retirement of the bonds using funds from newly issued common stock. c. parent's retirement of the bonds using funds from a subsidiary loan. d. parent's retirement of the bonds using funds from the sale of new bonds to non-affiliates. LO1 2. If an affiliate purchases bonds in the open market, the intercompany bond liability book value is: a. always assigned to the parent company because it has control b. the par value of the bonds less the discount or plus the premium and issuance costs at the time of issuance c. par value d. the par value of the bonds plus unamortized discount or less always assigned to the parent company because it has control unamortized premium LO2 3. Material constructive gains and losses from intercompany bond holdings are: a. are realized gains and losses from the issuing affiliate perspective b. are always assigned to the parent company because it has control c. *are realized and recognized from the consolidated entity perspective d. excluded from the consolidated income statement until the period in which they become realized. 161
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Australian Owl Company owns an 80% interest in Glider Company. On January 1, 2006, Australian Owl had $600,000, 8% bonds outstanding with an unamortized premium of $9,000. The bonds mature on December 31, 2010. Glider acquired one-third of Australian Owl’s bonds in the open market for $198,000 on January 1, 2006. On December 31, 2006, the books of the two affiliates held the following balances: Australian Owl ’s books 8% bonds payable $600,000 Premium on bonds 7,200 Interest expense 46,200 Glider ’s books Investment in Australian Owl bonds $198,400 Interest income 16,400 LO2 4. The gain from the bond purchase that will appear on the December 31, 2006 consolidated income statement is: a. $ 0. b. $4,400. c. $4,800. d. $5,000. LO2 5. Consolidated Interest Expense and consolidated Interest Income, respectively, that will appear on the consolidated income statement for the year ended December 31, 2006 is: a. $30,800 and $ 0. b. $30,800 and $16,400. c. $46,200 and $ 0. d. $46,200 and $16,400. LO2 6. Kingfisher Corporation owns 80% the voting stock of Tunnel Corporation. On January 1, 2006, Kingfisher paid $391,000 cash for $400,000 par of Tunnel’s 10% $1,000,000 par value outstanding bonds due on April 1, 2011. Tunnel’s bonds had a book value of $1,045,000 on January 1, 2006. Straight-line amortization is used. The gain or loss on the constructive retirement of $400,000 of Tunnel bonds on January 1, 2006 is reported in the 2006 consolidated income statement in the amount of: a. $14,000 b. $21,000 c. $23,000 d. $27,000. 162
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Chapter9ed07 - Chapter 7 Test Bank INTERCOMPANY PROFIT...

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