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Advanced Financial Accounting Ch8 Lecture Notes

Advanced Financial Accounting Ch8 Lecture Notes - 5-1...

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1 5-1 CHAPTER EIGHT Intercompany Indebtedness ACCT400 Advanced Financial Accounting Fall Semester 2008 5-2 Overview Related companies often lend and borrow funds within group 2 types of intercompany debt Direct intercompany debt : loan from one affiliate to another without participation of unrelated party Indirect intercompany debt : loan issued to unrelated party but subsequently purchased by an affiliate of issuer Eliminate all accounts arises from intercompany debt when preparing consolidated F/S
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2 5-3 Direct intercompany debt Eliminate ALL intercompany debt effects since no outsiders are involved Reason: a single company cannot lend or borrow to itself Eliminate items like investment in bonds, bonds payable, unamortized discount or premium, interest income and expense and accrued interest receivable and payable Textbook example: Case 1: Transfer at par value On January 1, 2001, S borrows $100,000 from P by issuing $100,000 par value, 12%, 10-year bond to P Eliminating entry (intercompany bond holdings) Bonds payable 100,000 Investment in S bonds 100,000 Eliminating entry (intercompany interest) Interest income ($100,000 × 12%) 12,000 Interest expense 12,000 Eliminating entries have NO effect on consolidated net income 5-4 Case 2: Transfer at discount or premium Same information except that P purchases S’s bonds for $90,000 only Bond interests are payable on January 1 and July 1 Assume straight-line method of amortization S’s journal entry (borrower/debtor): Jan 1 Cash 90,000 Discount on bonds payable 10,000 Bonds payable 100,000 July 1 Interest expense 6,500 Cash ($100,000 × 6%) 6,000 Discount on bonds payable ($10,000 ÷ 20) 500 Dec 31 Interest expense 6,500 Interest payable 6,000 Discount on bonds payable 500 Discount on B/P and carrying value of B/P over life of bonds
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3 5-5 P’s journal entry (lender/bond investor): Jan 1 Investment in S bonds 90,000 Cash 90,000 July 1 Cash 6,000 Investment in S bonds 500 Interest income 6,500 Dec 31 Interest receivable 6,000 Investment in S bonds 500 Interest income 6,500 Bond investment over life of bonds 5-6 Eliminating entries (in 2001): Bonds payable 100,000 Investment in S bonds 91,000 Discount on bonds payable 9,000 Interest income 13,000 Interest expense 13,000 Interest payable 6,000 Interest receivable 6,000 0 9,000 9,000 0 Discount on B/P 0 ($100,000) ($100,000) 0 Bonds payable 0 91,000 0 $91,000 Investment in S bonds 0 6,000 0 6,000 Interest receivable 0 (13,000) 0 ($13,000) Interest income 0 $13,000 $13,000 0 Interest expense 0
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