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Advanced Ch 8 - 8 Direct Intercompany Debt Transfer 0...

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Intercompany Indebtedness 8 Consolidation Overview Direct Intercompany Debt Transfer 0. A direct intercompany debt transfer involves a loan from one affiliate to another without  the participation of an unrelated party Indirect Intercompany Debt Transfer 1. An indirect intercompany debt transfer involves the issuance of debt to an unrelated party  and the subsequent purchase of the debt instrument by an affiliate of the issuer   Bond Sale Directly to an Affiliate 2. When one company sells bonds directly to an affiliate, all effects of the intercompany  indebtedness must be eliminated in preparing consolidated financial statements
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3. Transfer at par value 0. Assume that on January 1, 20X1, Special Foods borrows $100,000 from Peerless  Products by issuing $100,000 par value, 12 percent, 10-year bonds. During 20X1,  Special Foods records interest expense on the bonds of $12,000 ($100,000 x .12),  and Peerless records an equal amount of interest income. 1. In the preparation of consolidated financial statements for 20X1, two elimination  entries are needed in the consolidation workpaper to remove the effects of the  intercompany indebtedness: 2. These entries have no effect on consolidated net income because they reduce  interest income and interest expense by the same amount. 4. Transfer at a discount or premium 3. Bond interest income or expense recorded do not equal cash interest payments 4. Interest income/ expense amounts are adjusted for the amortization of the discount  or premium 5. On January 1, 20X1, Peerless Products purchases $100,000 par value, 12 percent,  10-year bonds from Special Foods for $90,000. Interest on the bonds is payable on  January 1 and July 1. The interest expense recognized by Special Foods and the  interest income recognized by Peerless each year include straight-line amortization  of the discount, as follows: 6. Entries by the debtor Eliminating Entries: E(1) Bonds Payable 100,000 Investment in Special Foods Bonds 100,000 Eliminate intercorporate bond holdings. E(2) Interest Income Interest Expense 12,000 Eliminate intercompany interest. 12,000 Cash interest ($100,000 x .12) $12,000 Amortization of discount ($10,000 / 20 semiannual interest periods) x 2 periods 1,000 Interest expense or income $13,000 January 1, 20X1 Cash 90,000 Discount on Bonds Payable 10,000 Bonds Payable 100,000 Issue bonds to Peerless Products. July 1, 20X1 Interest Expense 6,500 Discount on Bonds Payable 500 Cash 6,000 Semiannual payment of interest. December 31, 20X1 Interest Expense 6,500 Discount on Bonds Payable 500 Interest Payable 6,000 Accrue interest expense at year-end.
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7. Entries by the bond investor 8. Entry E(9) eliminates the bonds payable and associated discount against the  investment in bonds.
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