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05 - CHAPTER 5 UNDERSTANDING THE ISSUES 1 The first...

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Unformatted text preview: CHAPTER 5 UNDERSTANDING THE ISSUES 1. The first approach that could be used to reduce the overall consolidated interest cost but maintain the subsidiary as the debtor would have the parent advancing $1,000,000 to the subsidiary so that the subsidiary may retire the bonds. The former debt is retired, and a new long-term intercompany debt originates. The intercompany interest expense would be eliminated during the consolidation process. Another approach would have the parent purchasing the subsidiary bonds from outside parties and holding them as an investment. From a consolidated viewpoint, the debt is retired. Therefore, interest expense would be eliminated during the consolidation process. 2. At the 10% annual interest rate, an extraordinary loss on retirement of bonds will occur in the current year since the parent paid a premium to retire the subsidiary’s bonds. In the current and future years, consolidated net income will be increased by the difference between interest expense and interest revenue. This amount represents the amortization of the premium paid by the parent. At the 13% annual interest rate, an extraordinary gain on retirement of bonds will occur in the current year since the parent paid a discount to retire the subsidiary’s bonds. In the current and future years, consolidated net income will be reduced by the difference between interest revenue and interest expense. This amount represents the amortization of the discount paid by the parent to retire the bonds. 3. Since Company S was the original issuer of the bonds, it will absorb the extraordinary loss that results in the current year from the parent retiring the bonds at a premium. The noncontrolling interest will receive its share of this loss. In the current and future years, the subsidiary’s income will be increased by the difference between interest expense and interest revenue. The noncontrolling interest will receive its share of this amount. 4. In the current year, consolidated net income will include an extraordinary gain on retirement of bonds of $5,000 ($100,000 – $95,000). In the current and each of the next 4 years, consolidated net income will be reduced by $1,000 ($5,000 ÷ 5 years), which represents amortization of the discount paid by the parent. In the current year, the NCI will receive $1,000 ($5,000 × 20%) of the extraordinary gain on the retirement of bonds. In the current and each of the next 4 years, NCI share of income will be reduced by $200 ($1,000 × 20%). 5. a. Investing activities—Purchase of S Company ($800,000 – $50,000)............................ $(750,000) b. Investing activities—Purchase of S Company ($500,000 – $50,000)..................... $(450,000) Noncash financing activities—Issuance of notes payable....................................... 300,000 c. Investing activities—Cash acquired in purchase of S Company............................. $ 50,000 Noncash financing activities—Issuance of stock.....................................................Noncash financing activities—Issuance of stock....
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05 - CHAPTER 5 UNDERSTANDING THE ISSUES 1 The first...

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