Chapter 7 Test Bank

INTERCOMPANY PROFIT TRANSACTIONS BONDS

Multiple Choie !uestions
"O#
#$ The intero%pan& purhase o' the parent o%pan& (on)s (& a
su(si)iar& has the sa%e e''et on the onsoli)ate) 'inanial
state%ents as the
a$ purhase o' the (on)s (& a non*a''iliate$
($ parent+s retire%ent o' the (on)s usin, 'un)s 'ro% ne-l&
issue) o%%on stok$
$ parent+s retire%ent o' the (on)s usin, 'un)s 'ro% a
su(si)iar& loan$
)$ parent+s retire%ent o' the (on)s usin, 'un)s 'ro% the sale
o' ne- (on)s to non*a''iliates$
"O#
.$ I' an a''iliate purhases (on)s in the open %arket/ the
intero%pan& (on) lia(ilit& (ook 0alue is
a$ al-a&s assi,ne) to the parent o%pan& (eause it has
ontrol$
($ the par 0alue o' the (on)s less the )isount or plus the
pre%iu% an) issuane osts at the ti%e o' issuane$
$ par 0alue$
)$ the par 0alue o' the (on)s plus una%orti1e) )isount$
"O.
2$ Material onstruti0e ,ains an) losses 'ro% intero%pan& (on)
hol)in,s are
a$ reali1e) ,ains an) losses 'ro% the issuin, a''iliate3s
perspeti0e$
($ al-a&s assi,ne) to the parent o%pan& (eause it has
ontrol$
$ reali1e) an) reo,ni1e) 'ro% the onsoli)ate) entit&3s
perspeti0e$
)$ e4lu)e) 'ro% the onsoli)ate) ino%e state%ent until the
perio) in -hih the& (eo%e reali1e)$
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*#
9se the 'ollo-in, in'or%ation in ans-erin, :uestions ; an) <$
Australian O-l Co%pan& o-ns an =6> interest in ?li)er Co%pan&$ On
@anuar& #/ .66A/ Australian O-l ha) BA66/666/ => (on)s outstan)in,
-ith an una%orti1e) pre%iu% o' B7/666$ The (on)s %ature on Dee%(er
2#/ .6#6$ ?li)er a:uire) one*thir) o' Australian O-l3s (on)s in the
open %arket 'or B#7=/666 on @anuar& #/ .66A$ On Dee%(er 2#/ .66A/
the (ooks o' the t-o a''iliates hel) the 'ollo-in, (alanesC
Australian O-l3s (ooks
=> (on)s pa&a(le BA66/666
Pre%iu% on (on)s 7/.66
Interest e4pense ;A/.66
?li)er3s (ooks
In0est%ent in Australian O-l (on)s B#7=/;66
Interest ino%e #A/;66
"O.
;$ The ,ain 'ro% the (on) purhase that appeare) on the Dee%(er
2#/ .66A onsoli)ate) ino%e state%ent -as
a$ B 6$
($ B;/;66$
$ B;/=66$
)$ B</666$
"O.
<$ Consoli)ate) Interest E4pense an) onsoli)ate) Interest Ino%e/
respeti0el&/ that appeare) on the onsoli)ate) ino%e
state%ent 'or the &ear en)e) Dee%(er 2#/ .66A -as
a$ B26/=66 an) B 6$
($ B26/=66 an) B#A/;66$
$ B;A/.66 an) B 6$
)$ B;A/.66 an) B#A/;66$
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*.
"O.
A$ Din,'isher Corporation o-ns =6> the 0otin, stok o' Tunnel
Corporation$ On @anuar& #/ .66A/ Din,'isher pai) B27#/666 ash
'or B;66/666 par o' Tunnel3s #6> B#/666/666 par 0alue
outstan)in, (on)s/ )ue on April #/ .6##$ Tunnel3s (on)s ha) a
(ook 0alue o' B#/6;</666 on @anuar& #/ .66A$ Strai,ht*line
a%orti1ation is use)$ The ,ain or loss on the onstruti0e
retire%ent o' B;66/666 o' Tunnel (on)s on @anuar& #/ .66A -as
reporte) in the .66A onsoli)ate) ino%e state%ent in the
a%ount o'
a$ B#;/666$
($ B.#/666$
$ B.2/666$
)$ B.7/666$
9se the 'ollo-in, in'or%ation in ans-erin, :uestions 7/ =/ an) 7$
Ru'ous O-l In$ ha) B=66/666 par o' #6> (on)s pa&a(le outstan)in, on
@anuar& #/ .66A )ue @anuar& #/ .6#6 -ith an una%orti1e) )isount o'
B#A/666$ Bir) is a 76>*o-ne) su(si)iar& o' Ru'ous$ On @anuar& #/
.66A/ Bir) Corporation purhase) B#A6/666 par 0alue o' Ru'ous3s
outstan)in, (on)s 'or B#<./666$ The (on)s ha0e interest pa&%ent )ates
o' @anuar& # an) @ul& #/ an) %ature on @anuar& #/ .667$ Strai,ht*line
a%orti1ation is use)$
"O.
7$ Eith respet to the (on) purhase/ the onsoli)ate) ino%e
state%ent o' Ru'ous O-l Corporation an) Su(si)iar& 'or .66A
sho-e) a ,ain or loss o'
a$ B ;/666$
($ B ;/=66$
$ B =/666$
)$ B#6/.66$
"O.
=$ Bon) Interest Reei0a(le 'or .66A o' O-l3s (on)s on Bir)3s
(ooks -as
a$ B 7/A66$
($ B =/666$
$ B#</.66$
)$ B#A/666$
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*2
"O.
7$ Bon)s Pa&a(le appeare) in the Dee%(er 2#/ .66A onsoli)ate)
(alane sheet o' Ru'ous O-l Corporation an) Su(si)iar& in the
a%ount o'
a$ BA.;/666$
($ BA.=/666$
$ BA26/;66$
)$ BA27/=66$
9se the 'ollo-in, in'or%ation 'or :uestions #6 throu,h #<$
Dollar(ir) Corporation issue) 'i0e thousan)/ B#/666 par/ #.> (on)s on
@anuar& #/ .66;$ Interest is pai) on @anuar& # an) @ul& # o' eah
&earF the (on)s %ature on @anuar& #/ .667$ On @anuar& #/ .66A/ Branh
Corporation/ an =6>*o-ne) su(si)iar& o' Dollar(ir)/ purhase) 2/666
o' the (on)s on the open %arket at #6#$<6$ Dollar(ir)+s separate net
ino%e 'or .66A inlu)e) the annual interest e4pense 'or all 2/666
(on)s$ Branh3s separate net ino%e -as B266/666/ -hih inlu)e) the
(on) interest reei0e) on @ul& # as -ell as the arual o' (on)
interest re0enue earne) on Dee%(er 2#$
"O.
#6$ Ehat -as the a%ount o' ,ain or GlossH 'ro% the intero%pan&
purhase o' Dollar(ir)3s (on)s on @anuar& #/ .66AI
a$ BGA6/666H$
($ BG;</666H$
$ B ;</666$
)$ B A6/666$
"O.
##$ I' the (on)s -ere ori,inall& issue) at #6A/ an) =6> o' the%
-ere purhase) (& Branh on @anuar& #/ .667 at 7=/ the ,ain or
GlossH 'ro% the intero%pan& purhase -as
a$ BG..;/666H$
($ BG#7A/666H$
$ B #7A/666$
)$ B ..;/666$
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*;
"O.
#.$ I' the (on)s -ere ori,inall& issue) at #62/ an) 76> o' the%
-ere purhase) on @anuar& #/ .66= at #6;/ the onstruti0e ,ain
or GlossH on the purhase -as
a$ BG##7/666H$
($ BG2</666H$
$ B2</666$
)$ B##7/666$
"O.
#2$ 9sin, the ori,inal in'or%ation/ the a%ount o' onsoli)ate)
Interest E4pense 'or .66A -as
a$ B #.6/666$
($ B .;6/666$
$ B 266/666$
)$ B A66/666$
"O.
#;$ 9sin, the ori,inal in'or%ation/ the (alanes 'or the Bon)s
Pa&a(le an) Bon) Interest Pa&a(le aounts/ respeti0el&/ on
the onsoli)ate) (alane sheet 'or Dee%(er 2#/ .667 -ere
a$ B./666/666 an) B#.6/666$
($ B./666/666 an) B.;6/666$
$ B</666/666 an) B#.6/666$
)$ B</666/666 an) B.;6/666$
"O.
#<$ The eli%ination entries on the onsoli)ation -orkin, papers
prepare) on Dee%(er 2#/ .66A inlu)e) at least
a$ )e(it to Bond Interest Expense 'or B2A6/666$
($ re)it to Bond Interest Expense 'or B2A6/666 an) a )e(it to
Bond Interest Payable 'or B#=6/666$
$ re)it to Bond Interest Receivable 'or B2A6/666$
)$ )e(it to Bond Interest Revenue 'or B2A6/666$
"O2
#A$ No onstruti0e ,ain or loss arises 'ro% the purhase o' an
a''iliate3s (on)s i' the
a$ a''iliate is a #66>*o-ne) su(si)iar&$
($ (on)s are purhase) at (ook 0alue$
$ (on)s are purhase) -ith ar%3s*len,th (ar,ainin, 'ro%
outsi)e entities$
)$ ,ain or loss annot (e reasona(l& esti%ate)$
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*<
"O2
#7$ Construti0e ,ains or losses are alloate) (et-een purhasin,
an) issuin, a''iliates aor)in, to
a$ the a,en& theor&$
($ the par 0alue theor&$
$ either the a,en& theor& or the par 0alue theor&$
)$ neither the a,en& theor& nor the par 0alue theor&$
"O2
#=$ No alloation o' ,ain or loss on the onstruti0e retire%ent o'
intero%pan& (on)s -ill our
a$ -hen the su(si)iar& is the issuin, a''iliate$
($ -hen the e''eti0e interest rate %etho) is applie)$
$ in the onsoli)ate) ino%e state%ent$
)$ -hen the parent o%pan& is the issuin, a''iliate$
9se the 'ollo-in, in'or%ation in ans-erin, :uestions #7 an) .6$
Mistletoe(ir) Corporation o-ns an =6> interest in Berries Co%pan&
a:uire) at (ook 0alue se0eral &ears a,o$ On @anuar& #/ .66A/ Berries
purhase) B#66/666 par o' Mistletoe(ir)3s outstan)in, (on)s 'or
B#62/666$ The (on)s -ere issue) at par an) %ature on @anuar& #/ .667$
Strai,ht*line a%orti1ation is use)$ Separate ino%es o' Mistletoe(ir)
an) Berries 'or .66A are B2<6/666 an) B#.6/666/ respeti0el&$
"O;
#7$ Consoli)ate) net ino%e 'or .66A -as
a$ B;;2/A66$
($ B;;;/666$
$ B;;;/;66$
)$ B;;=/666$
"O;
.6$ Minorit& interest ino%e 'or .66A -as
a$ B.2/666$
($ B.2/A66$
$ B.;/666$
)$ B.;/;66$
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*A
"O#
E4erise #
Separate o%pan& an) onsoli)ate) ino%e state%ents 'or Pitta an) Ne-
?uinea Corporations 'or the &ear en)e) Dee%(er 2#/ .66A are
su%%ari1e) as 'ollo-sC
Pitta Ne-
?uinea
Consoli*
)ate)
Sales Re0enue B <66/666 B #66/666 B A66/666
Ino%e 'ro% Ne- ?uinea #7/766
Bon) interest ino%e A/666
?ain on (on) retire%ent 2/666
Total re0enues <#7/766 #6A/666 A62/666
Cost o' sales B .=6/666 B <6/666 B 226/666
Bon) interest e4pense 7/666 2/A66
Other e4penses #.6/766 2#/666 #<#/766
Minorit& interest ino%e 7/<66
Total e4penses ;67/766 =#/666 ;72/666
Net ino%e B ##6/666 B .</666 B ##6/666
The interest ino%e an) e4pense eli%inations relate to a B#66/666/ 7>
(on) issue that -as issue) at par 0alue an) %atures on @anuar& #/
.6##$ On @anuar& #/ .66A/ a portion o' the (on)s -as purhase) an)
onstruti0el& retire)$
Re:uire)C Ans-er the 'ollo-in, :uestions$
#$ Ehih o%pan& is the issuin, a''iliateI
.$ Ehat is the )ollar e''et o' the onstruti0e retire%ent on
onsoli)ate) net ino%e 'or .66AI
2$ Ehat portion o' the (on)s re%ains outstan)in, at Dee%(er 2#/
.66AI
;$ Is Ne- ?uinea a -holl&*o-ne) su(si)iar&I I' not/ -hat perenta,e
)oes Pitta o-nI
<$ Does the purhasin, a''iliate use strai,ht*line or e''eti0e
interest a%orti1ationI
A$ E4plain the alulation o' Pitta3s B#7/766 ino%e 'ro% Ne-
?uinea$
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*7
"O#
E4erise .
@ak& Einter Corporation o-ns a 76> interest in Park Co%pan&$ The
'ollo-in, in'or%ation is 'ro% the a)Juste) trial (alanes at Dee%(er
2#/ .66</ at -hih ti%e the (on)s ha0e 'our &ears to %aturit&$ @ak&
Einter a:uire) Park3s (on)s at the (e,innin, o' the &ear$ The (on)s
ha0e interest pa&%ent )ates o' @anuar& # an) @ul& #$
@ak&
Einter
Park
In0est%ent in Park Bon)s/ B.66/666 par #7A/666
#6> Bon)s pa&a(le/ B;66/666 ;66/666
Bon) pre%iu% #A/666
Interest e4pense 2A/666
Interest reei0a(le #6/666
Interest ino%e .#/666
Interest pa&a(le .6/666

Re:uire)C
Prepare the neessar& onsoli)ation -orkin, paper entries on Dee%(er
2#/ .66A -ith respet to the intero%pan& (on)s$
"O.
E4erise 2
Pheasant Corporation o-ns =6> o' Rural Corporation3s outstan)in,
o%%on stok that -as purhase) at (ook 0alue an) 'air 0alue on
@anuar& #/ #777$
A))itional in'or%ationC
#$ Pheasant sol) in0entor& ite%s that ost B2/666 to Rural )urin,
.66A 'or BA/666$ One*hal' o' this %erhan)ise -as in0entorie) (&
Rural at &ear*en)$ At Dee%(er 2#/ .66A/ Rural o-e) Pheasant
B./666 on aount 'ro% the in0entor& sales$ No other
intero%pan& sales o' in0entor& ha0e ourre) sine Pheasant
a:uire) its interest in Rural$
.$ Pheasant sol) a plant asset -ith a (ook 0alue o' B</666 an) a <*
&ear use'ul li'e to Rural 'or B#6/666 on Dee%(er 2#/ .66;$ This
plant asset re%ains in use (& Rural an) is )epreiate) (& the
strai,ht*line %etho)$
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*=
2$ On @anuar& ./ .66A/ Rural pai) B#6/=66 'or B#6/666 par 0alue o'
Pheasant3s #6*&ear/ #6> (on)s$ These (on)s ha0e interest pa&%ent
)ates o' @anuar& # an) @ul& #/ an) %ature on @anuar& #/ .6#6$
Strai,ht*line a%orti1ation has (een applie) (& Rural to the
Pheasant (on) in0est%ent$
;$ Pheasant uses the e:uit& %etho) in aountin, 'or its in0est%ent
in Rural$
Re:uire)C
Co%plete the -orkin, papers to onsoli)ate the 'inanial state%ents
o' Pheasant Corporation an) Rural 'or the &ear en)e) Dee%(er 2#/
.66A$
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*7
Pheasant Corporation an) Su(si)iar&
Consoli)ation Eorkin, Papers
at Dee%(er 2#/ .66A
Pheasant Rural
Eli%inations Balane
Sheet De(it Cre)it
INCOME STATEMENT
Sales B <6/666 B .;/666
Ino%e 'ro% A/766
?ain or loss on
(on)s
Interest Ino%e =66
Cost o' sales G #;/666H G 7/666H
Depreiation G 2/766H G </=66H
Interest e4pense G ./666H
Net ino%e 27/666 #6/666
Retaine)
Earnin,s #K# #./666 =/666
A))C Net ino%e 27/666 #6/666
Di0i)en)s G A/666H G ./666H
Retaine)
Earnin,s #.K2# B ;2/666

B #A/666
BA"ANCE S8EET
Cash =/666 #/;66
Interest Re <66
Reei0a(les ##/666 2/<66
In0entories </666 2/666
E:uip%ent*net ;2/666 2#/666
In0est%ent in
Rural stok 26/#66
In0est%ent in
Pheasant (on)s #6/A66
TOTA" ASSETS B 77/#66 B <6/666
"IAB$ L E!9ITY
Aounts pa&a(le

2/#66 A/666
Interest pa&a(le #/666
Bon)s pa&a(le .6/666
Capital stok 26/666 .=/666
Retaine)
Earnin,s ;2/666 #A/666
#K# Nonontrl$
Interest
#.K2# Nonontrl$
Interest
E4pense
TOTA" "IAB$ L
E!9ITY
B
77/#66 B <6/666
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*#6
"O.
E4erise ;
Dee%(er 2#/ .66A (alane sheets 'or Eren Corporation/ an) Shru(
Corporation/ its 76>*o-ne) su(si)iar&/ are presente) in the 'irst t-o
olu%ns o' partiall& o%plete) (alane sheet -orkin, papers$ Eren
pai) B#A6/666 'or its 76> interest in Shru( on @anuar& #/ .662 -hen
Shru( ha) B#<6/666 o' total stokhol)ers3 e:uit&$ The B.</666 ost*
(ook )i''erential -as assi,ne) to plant assets -ith a #6*&ear
re%ainin, li'e$
On @anuar& #/ .66A/ Eren purhase) B<6/666 o' Shru( Corporation3s
#6> (on)s 'or B;=/666/ at -hih ti%e the una%orti1e) pre%iu% on the
(on)s -as B./666$ The (on)s pa& interest on @une 26 an) Dee%(er 2#
an) %ature on Dee%(er 2#/ .6#6$ Both Eren an) Shru( use strai,ht*
line a%orti1ation$ Eren uses the e:uit& %etho) o' aountin, 'or its
in0est%ent in Shru($
Re:uire)C
Co%plete the onsoli)ate) (alane sheet -orkin, papers$
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*##
Eren Corporation an) Su(si)iar&
Consoli)ate) Balane Sheet Eorkin, Papers
at Dee%(er 2#/ .66A
Eren Shru(
Eli%inations Non*
Cntl$
Consol*
i)ate) De(it Cre)it
BA"ANCE S8EET
Cash B

27/#66

B 26/666
Reei0a(les =6/666 7</666
Interest
Reei0a(le ./<66
In0entories 76/666 ;6/666
"an) <6/666 ;</666
Plant assets*net #A6/666 #.6/666
In0est%ent in
Shru( (on)s ;=/;66
In0est%ent in
Shru( stok #77/#A6
TOTA" ASSETS B A.7/#A6 B2#6/666
"IAB$ L E!9ITY
Aounts pa&a(le

;7/666 .2/;66
Bon) interest
pa&a(le #6/666 </666
#6> Bon)s
Pa&a(le .66/666 #66/666
Pre%iu% on (on)s
pa&a(le #/A66
Capital stok .=6/666 #.6/666
Retaine)
Earnin,s 7./#A6 A6/666
Minorit&
Interest
TOTA" "IAB$ L
E!9ITY B A.7/#A6 B2#6/666
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*#.
"O.
E4erise <
Sun(ir) Corporation o-ns a 76> interest in Meran)a Corporation$ At
Dee%(er 2#/ .66</ Meran)a ha) B2/666/666 o' par 0alue #.> (on)s
outstan)in, -ith an una%orti1e) pre%iu% o' BA6/666$ The (on)s ha0e
interest pa&%ent )ates o' @anuar& # an) @ul& # an) %ature on @anuar&
#/ .6#6$
On @anuar& ./ .66A/ Sun(ir) purhase) B#/.66/666 par 0alue o'
Meran)a3s outstan)in, (on)s 'or B#/.67/A66$ Assu%e strai,ht*line
a%orti1ation$
Re:uire)C
Prepare the neessar& onsoli)ation -orkin, paper entries on Dee%(er
2#/ .66A -ith respet to the intero%pan& (on)s$
"O.
E4erise A
Rok is an =6>*o-ne) su(si)iar& o' ?i((er(ir)$ On @anuar& #/ .66</
Rok issue) B;<6/666 o' B#/666 'ae a%ount A> (on)s at par$ The (on)s
ha0e interest pa&%ents on @anuar& # an) @ul& # o' eah &ear an)
%ature on @anuar& #/ .667$ On @ul& #/ .66A/ ?i((er(ir) purhase) all
;<6 (on)s on the open %arket 'or B#/626 per (on)$
Re:uire)C Eith respet to the (on)s/ use ?eneral @ournal 'or%at toC
#$ Reor) the .66A Journal entries 'ro% @ul& # to Dee%(er 2# on
Rok3s (ooks$
.$ Reor) the .66A Journal entries 'ro% @ul& # to Dee%(er 2# on
?i((er(ir)3s (ooks$
2$ Reor) the eli%ination entries 'or the onsoli)ation -orkin,
papers at Dee%(er 2#/ .66A$

5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*#2
"O. L 2
E4erise 7
Caterpillar In$ is an =6>*o-ne) su(si)iar& o' Bell(ir) Corp$ On
@anuar& #/ .66</ Caterpillar issue) BA66/666 o' B#/666 'ae a%ount A>
(on)s at B7A; per (on)$ Interest is pai) on @anuar& # an) @ul& # o'
eah &ear an) o0ers the pree)in, si4 %onths$ On @ul& #/ .66A/
Bell(ir) purhase) all A66 (on)s on the open %arket 'or B#/626 per
(on)$ The 'ollo-in, ta(le sho-s selete) a%ounts o' a%orti1ation on
the (on)sC
A%orti1ation Ta(le 'or the Bon) Disount
Date Re%ainin, Balane
6#*6#*6< B.#/A66
#.*2#*6< #;/;66
67*6#*6A #6/=66
#.*2#*6A 7/.66
#.*2#*67 6
Re:uire)C Eith respet to the (on)s/ use ?eneral @ournal 'or%at toC
#$ Reor) the .66A Journal entries 'ro% @ul& # to Dee%(er 2# on
Caterpillar3s (ooks$
.$ Reor) the .66A Journal entries 'ro% @ul& # to Dee%(er 2# on
Bell(ir)3s (ooks$
2$ Reor) the eli%ination entries 'or the onsoli)ation -orkin,
papers at Dee%(er 2#/ .66A$

5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*#;
"O.L2
E4erise =
Thorn(ill Corporation o-ns 76> o' the outstan)in, 0otin, o%%on stok
o' 8an,out Corporation$ On @anuar& #/ #77=/ 8an,out issue) B#/666/666
'ae a%ount o' #.>/ B#/666 (on)s pa&a(le at ##7$.6$ The (on)s pa&
interest on @anuar& # an) @ul& # o' eah &ear an) %ature on 'or on
@anuar& #/ .667$ On @ul& #/ .66A/ Thorn(ill purhase) all o' the
outstan)in, (on)s at a prie o' #67$<6$
Re:uire)C
#$ E4plain the relationship (et-een the (alanes in the In0est%ent
in 8an,out Bon)s aount on Thorn(ill3s (ooks an) the (on)*
relate) aounts/ i$e$/ Bon)s Pa&a(le an) DisountKPre%iu% on
Bon)s Pa&a(le/ on 8an,out3s (ooks$
.$ 9sin, &our -ritten rationale 'ro% Re:uire%ent #/ )eter%ine the
(alane in the In0est%ent in 8an,out Bon)s aount on Dee%(er
2#/ .66A/ Oto(er 2#/ .667/ Ma& 2#/ .66= an) No0e%(er 26/ .66=/
assu%in, that a%orti1ation is reor)e) %onthl&$
"O2L;
E4erise 7
8one&eater Corporation o-ns a A6> interest in Eaterhole Corporation
a:uire) se0eral &ears a,o at a prie e:ual to (ook 0alue an) 'air
0alue$ On Dee%(er 2#/ .66</ Eaterhole ha) B766/666 par o' #.> (on)s
outstan)in, -ith an una%orti1e) pre%iu% o' B26/666$ The (on)s %ature
in 'i0e &ears an) pa& interest on @anuar& # an) @ul& #$ On @anuar& #/
.66A/ 8one&eater a:uire) one*thir) o' Eaterhole3s (on)s 'or
B2#7/666$ 8one&eater an) Eaterhole use strai,ht*line a%orti1ation$
Eaterhole reports net ino%e o' B266/666 'or .66A$
Re:uire)C
#$ Calulate 8one&eater3s ino%e 'ro% Eaterhole 'or .66A$
.$ Calulate the %inorit& interest ino%e 'or .66A$
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*#<
"O;
E4erise #6
Eill& Ea,tail Co%pan& has B;/666/666 o' #.> (on)s outstan)in, on
Dee%(er 2#/ .66; -ith una%orti1e) pre%iu% o' B#.6/666$ These (on)s
pa& interest se%iannuall& on @anuar& # an) @ul& # an) %ature on
@anuar& #/ .6#6$ Strai,ht*line a%orti1ation is use)$
?ar)en In$/ =6>*o-ne) su(si)iar& o' Eill& Ea,tail/ (u&s B#/666/666
par 0alue o' Eill& Ea,tail3s outstan)in, (on)s in the %arket 'or
B7=6/666$ There is onl& one issue o' outstan)in, (on)s o' the
a''iliate) o%panies an) the& ha0e onsoli)ate) 'inanial state%ents$
For the &ear .66</ Eill& Ea,tail has ino%e 'ro% its separate
operations Ge4lu)in, in0est%ent ino%eH o' B;/<66/666 an) ?ar)en
reports net ino%e o' BA66/666$
Re:uire)C Deter%ine the 'ollo-in,C
#$ Nonontrollin, interest e4pense 'or .66<$
.$ Consoli)ate) net ino%e 'or Eill& Ea,tail Co%pan& an) su(si)iar&
'or .66<$
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*#A
SO"9TIONS
Multiple Choie !uestions
#
. (
2
; ) Book 0alue o' Australian O-l3s
(on)s a:uire) (& ?li)er e:uals
#K2 ti%es GBA66/666 N B7/666H B .62/666
"essC Cost o' a:uirin,
Australian O-l (on)s #7=/666
Construti0e ,ain on Australian
O-l (on)s
B </666
< a Consoli)ate) interest e4pense O
B;A/.66 4 .K2 B 26/=66
A )
7 (
= (
7
; ( Australian O-l3s separate
ino%eC
B 2<6/666
Ino%e 'ro% ?li)er GB#.6/666 4
=6>H O 7A/666
"essC "oss on onstruti0e
retire%ent o' Australian O-l3s
(on)s
G 2/666 H
PlusC Piee%eal reo,nition o'
the onstruti0e loss GB2/666K2
&earsH O #/666
Consoli)ate) net ino%e B ;;;/666
< Beause Australian O-l is the
issuin, entit& the ,ain or loss
is not alloate) to the
nonontrollin, interest$ The
nonontrollin, interest e4pense
is GB#.6/666 4 .6>H or
B .;/666
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*#7
= Full interest 'or #. %onths
E:uals B7.6/666 4 #6> B 7./666
"essC interest on B.26/666 'or 7
%onths O B.26/666 4 #6> 4 7<> #7/.<6
Consoli)ate) interest e4pense B 7;/7<6

7 )
Book 0alue o' Poleat3s (on)s
B ;/6.;/666
4 > purhase) (& Sea)o, ;6>
E:ualsC Book 0alue purhase) B #/A67/A66
Purhase prie GB776 4 #/A66HO #/<<./666
?ain on retire%ent B <7/A66
#6 ( Total (ook 0alue a:uire) O
B</666/666 4 A6> B 2/666/666
Purhase prie 2/666 (on)s 4
B#/6#<
2/6;</666
"oss on onstruti0e retire%ent B ;</666
## Book 0alue at @anuar& #/ .667
e:uals B</266/666 %inus
B#=6/666O
B </#.6/666
Perenta,e o' (on)s a:uire) =6>
E:uals (ook 0alue a:uire) ;/67A/666
Purhase prie ;/666 (on)s 4
B7=6O
2/7.6/666
?ain on onstruti0e retire%entO B #7A/666
#. a Book 0alue at @anuar& #/ .66=
e:uals B</#<6/666 %inus B#.6/666
B </626/666
Perenta,e o' (on)s a:uire) 76>
E:uals (ook 0alue a:uire) 2/<.#/666
Purhase prie 2/<66 (on)s 4
B#/6;6
2/A;6/666
"oss on onstruti0e retire%ent B ##7/666
#2 ( GB</666/666 * B2/666/666H 4 #.>
O
B .;6/666
#; a Bon)s pa&a(le B</666/666 %inus
(on)s hel) (& Branh o'
B2/666/666
B ./666/666
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*#=
Interest arue) on Dee%(er 2#/
.667 -ill (e the interest on
(on)s hel) (& non*a''iliates or
B./666/666 4 #.> 4 P &ear O B #.6/666
#< (
#A (
#7
#= )
#7 ( Mistletoe(ir)3s separate ino%eC B 2<6/666
Ino%e 'ro% Berries GB#.6/666 4
=6>H O 7A/666
"essC "oss on onstruti0e
retire%ent o' Mistletoe(ir)
(on)s
G 2/666 H
PlusC Piee%eal reo,nition o'
the onstruti0e loss GB2/666K2
&earsH O #/666
Consoli)ate) net ino%e B ;;;/666
.6 Sine Mistletoe(ir) is the
issuin, entit& the ,ain or loss
is not alloate) to the
nonontrollin, interest$ The
nonontrollin, interest ino%e
is GB#.6/666 4 .6>H$
B .;/666
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*#7
E4erise #
#$ Pitta is the issuin, a''iliate$
.$ E''et on onsoli)ate) net ino%eC
?ain on onstruti0e retire%ent o' (on)s B 2/666
"essC Piee%eal reo,nition o' ,ain GBA/666
interest ino%e * B</;66 interest e4penseH G A66 H
Inrease in onsoli)ate) net ino%e B ./;66
2$ Perent o' (on)s outstan)in, on Dee%(er 2#/ .66A is ;6>/
o%pute) as B2/A66 onsoli)ate) interest e4pense )i0i)e) (&
B7/666 interest e4pense o' Pitta$
;$ Ne- ?uinea is partiall& o-ne) as e0i)ene) (& the %inorit&
interest ino%e$ The o-nership perenta,e is 76> GB7/<66
%inorit& interest ino%e )i0i)e) (& B.</666 ino%e o' Ne-
?uinea O 26> %inorit& interest$
<$ Strai,ht*line a%orti1ation
B#66/666 par 4 A6> purhase) B A6/666
Purhase prie < &ears (e'ore %aturit& <7/666
?ain 2/666
No%inal interest GBA6/666 4 7>H B </;66
Disount a%orti1ation GB2/666K< &earsH A66
Bon) interest ino%e B A/666
A$ Pitta3s ino%e 'ro% Ne- ?uinea
Share o' Ne- ?uinea3s reporte) ino%e
GB.</666 4 76>H O B #7/<66
A))C Construti0e ,ain 2/666
"essC Piee%eal reo,nition o' onstruti0e
,ain G A66 H
Ino%e 'ro% Ne- ?uinea B #7/766
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*.6
E4erise .
.66A De(it Cre)it
#.K2# Bon) Interest Pa&a(le #6/666
Bon) Interest Reei0a(le #6/666
#.K2# Bon)s Pa&a(le .66/666
Interest Re0enue .#/666
Bon) pre%iu% =/666
Interest E4pense G<6> o-ne)H #=/666
In0est%ent in Park3s Bon)s #7A/666
?ain on (on)s #</666
Supportin, Co%putationsC
Cost o' (on)s to @ak& Einter
#7A/666*#/666 a%orti1ation
B #7</666
Book 0alue a:uire) #K#K.66< -here
;/666 per &ear is a%orti1e)
GB;66/666 N B.6/666H 4 <6> O
.#6/666
?ain on onstruti0e (on) retire%ent B #</666
E4erise 2
Pheasant Corporation an) Su(si)iar&
Consoli)ation Eorkin, Papers
at Dee%(er 2#/ .66A
Pheasant Rural
Eli%inations Non*
ontl$
Consol*
i)ate) De(it Cre)it
INCOME STATEMENT
Sales B <6/666 B.;/666 a B A/666 BA=/666
Ino%e 'ro% A/766 e A/766
"oss on (on)s ) =66 G =66H
Interest Ino%e =66 ) =66
Cost o' sales G #;/666H G 7/666H ( #/<66 a B A/666 G #=/<66H
Depreiation G 2/766H G </=66H #/666 G =/766H
Interest e4pense G ./666H ) #/666 G #/666H
Minorit& ino%e B./666 G ./666H
Net ino%e 27/666 #6/666 27/666
Retaine)
Earnin,s #K# #./666 =/666 ' =/666 #./666
A))C Net ino%e 27/666 #6/666 27/666
Di0i)en)s G A/666H G ./666H e #/A66G ;66H G A/666H
Retaine)
Earnin,s #.K2# B ;2/666

B#A/666 B;2/666
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*.#
BA"ANCE S8EET
Cash =/666 #/;66 B 7/;66
Interest Re <66 h <66
Reei0a(les ##/666 2/<66 , ./666 #./<66
In0entories </666 2/666 ( #/<66 A/<66
E:uip%ent*net ;2/666 2#/666 2/666 7#/666
In0est%ent in
Rural stok 26/#66
;/666 e
'
</266
.=/=66
In0est%ent in
Pheasant (on)s #6/A66 ) #6/A66
TOTA" ASSETS B 77/#66 B<6/666 B77/;66
"IAB$ L E!9ITY
Aounts pa&a(le

2/#66 A/666 , ./666 7/#66
Interest pa&a(le #/666 h <66 <66
Bon)s pa&a(le .6/666 ) #6/666 #6/666
Capital stok 26/666 .=/666 ' .=/666 26/666
Retaine)
Earnin,s ;2/666 #A/666 ;2/666
#K# Nonontl$
Interest ' 7/.66 7/.66
#.K2# Nonontl$
Interest E4pense =/=66 =/=66
TOTA" "IAB$ L
E!9ITY
B
77/#66 B<6/666
B77/;66
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*..

E4erise ;
Eren Corporation an) Su(si)iar&
Consoli)ate) Balane Sheet Eorkin, Papers
at Dee%(er 2#/ .66A
Eren Shru(
Eli%inations Non*
ntl
Consol*
i)ate) De(it Cre)it
BA"ANCE S8EET
Cash B

27/#66

B26/666 BA7/#66
Reei0a(les =6/666 7</666 #<</666
Interest
Reei0a(le ./<66 B ./<66
In0entories 76/666 ;6/666 ##6/666
"an) <6/666 ;</666 7</666
Plant assets*net #A6/666 #.6/666 ( B #</666 .7</666
In0est%ent in
Shru( (on)s ;=/;66 a ;=/;66
In0est%ent in
Shru( stok #77/#A6
a
(
./#A6
#77/666
TOTA" ASSETS B A.7/#A6 B2#6/666 B7.;/#66
"IAB$ L E!9ITY
Aounts pa&a(le

;7/666 .2/;66 76/;66
Bon) interest
pa&a(le #6/666 </666 ./<66 #./<66
#6> Bon)s
Pa&a(le .66/666 #66/666 a <6/666 .<6/666
Pre%iu% on (on)s
pa&a(le #/A66 a =66 =66
Capital stok .=6/666 #.6/666 ( #.6/666 .=6/666
Retaine)
Earnin,s 7./#A6 A6/666 ( A6/666 7./#A6
Nonontrolin,
Interest
a
(
.;6
#=/666 #=/.;6
TOTA" "IAB$ L
E!9ITIES
B
A.7/#A6 B2#6/666
.;=/266 .;=/266 B7.;/#66
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*.2
Supportin, o%putations
Book 0alue o' (on)s
GB#6./666 4 <6>H B <#/666
Cost o' a:uirin, B<6/666 par G ;=/666 H
Construti0e ,ain 2/666
Piee%eal reo,nition o' ,ain G A66 H
9nreo,ni1e) at Dee%(er 2#/
.66A B ./;66
MaJorit& share GB./;66 4 76>H B ./#A6
Minorit& share GB./;66 4 #6>H B .;6
E4ess alloate) to plant
assets B .</666
Depreiation 'or ; &ears
GB./<66 4 ; &earsH G #6/666 H
Re%ainin, e4ess B #</666
E4erise <
.66A De(it Cre)it
#.K2# Bon) Interest Pa&a(le 7./666
Bon) Interest Reei0a(le 7./666
#.K2# Pre%iu% on Bon)s Pa&a(le #=/666
Bon)s Pa&a(le #/.66/666
Interest Re0enue #;#/A66
Interest E4pense #2=/666
In0est%ent in Meran)a Bon)s #/.67/.66
?ain on Retire%ent o' Bon)s #;/;66
Supportin, Co%putationsC
Cost o' (on)s to Sun(ir) B #/.67/A66
Book 0alue a:uire)
GB2/666/666 N BA6/666H 4 ;6> O #/..;/666
?ain on onstruti0e (on) retire%ent B #;/;66
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*.;
; &ears re%ainin,
Pre%iu% on Bon) Pa&a(le
BA6/666 4 2K; 4 ;6> O B#=/666
Interest E4pense
B#/.66/666 4 #.> O B#;;/666
"essC BA6/666 4 #K; 4 ;6> O B A/666
B#2=/666
Interest Re0enue
B#;;/666 * GB7/A66 4 #K;H O B#;#/A66
E4erise A
Date
.66A Aount Na%e De(it Cre)it
?i((er(ir)3s (ooks
@ul 6# In0est%ent in Rok Bon)s ;A2/<66
Cash ;A2/<66
De 2# Bon) Interest Reei0a(le #2/<66
Bon) Interest Re0enue #6/=66
In0est%ent in Rok Bon)s ./766
Rok3s (ooks
De 2# Bon) Interest E4pense #2/<66
Bon) Interest Pa&a(le #2/<66
Consoli)ate) Eorkin, Papers
De 2# Bon) Interest Pa&a(le #2/<66
Bon) Interest Reei0a(le #2/<66
De 2# Bon)s Pa&a(le ;<6/666
"oss on Bon)s #2/<66
Bon) Interest Re0enue #6/=66
Bon) Interest E4pense #2/<66
In0est%ent in Rok Bon)s ;A6/=66
Interest Re0enueC
GB;<6/666 4 A> 4 #K.H * GB#2/<66 pre%iu%K< perio)sH O
B#2/<66 * B./766 O B#6/=66
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*.<
E4erise 7
Date
.66A Aount Na%e De(it Cre)it
Bell(ir)3s (ooks
@ul 6# In0est%ent in Caterpillar Bon)s A#=/666
Cash A#=/666
De 2# Bon) Interest Reei0a(le #=/666
Bon) Interest Re0enue #;/;66
In0est%ent in Caterpillar Bon)s 2/A66
Caterpillar3s (ooks
De 2# Bon) Interest E4pense .#/A66
Bon) Interest Pa&a(le #=/666
Disount on Bon)s Pa&a(le 2/A66
Consoli)ate) Eorkin, Papers
De 2# Bon) Interest Pa&a(le #=/666
Bon) Interest Reei0a(le #=/666
De 2# Bon)s Pa&a(le A66/666
"oss on Bon)s .=/=66
Bon) Interest Re0enue #;/;66
Bon) Interest E4pense .6/A66
Disount on Bon)s Pa&a(le 7/.66
In0est%ent in Caterpilllar Bon)s A#;/;66
GBook 0alue o' (on)s B<=7/.66 * purhase ost BA#=/666 O B.=/=66 lossH
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*.A

E4erise =
Re:uire%ent #
The purpose o' the In0est%ent in 8an,out Bon)s aount on the
a:uirer3s (ooks an) the Bon)s Pa&a(le/ Disount on Bon)s
Pa&a(leKPre%iu% on Bon)s Pa&a(le aounts on the issuer3s (ooks is
si%ilar in that eah set o' aounts is trakin, the net (ook 0alue
o' the (on)s$ Sine -e kno- that at the %aturit& )ate the net (ook
0alue o' the (ooks %ust (e e:ual to the 'ae a%ount o' the (on)s
(ein, re)ee%e)/ then no %atter -hat a%ounts are initiall& plae) into
these aounts/ the (alane on the %aturit& )ate is e:ual to the
%aturit& 0alue o' the (on)s$ There'ore/ (oth sets o' aounts are
%o0in, to-ar) the sa%e 'inal nu%(er$ In this pro(le%/ the ori,inal
pre%iu% on the (on)s is a total o' B#7./666 -hih is B#7. per (on)$
Sine the (on)s ha0e an ei,ht*&ear or 7A*%onth ter%/ the rate o'
a%orti1ation is B. per %onth per (on) or B./666 per %onth in total$
Ehen Thorn(ill a:uires the (on)s it pa&s a pre%iu% o' B7</666 -hih/
-hen a%orti1e) o0er the 26*%onth re%ainin, li'e o' the (on) -ill
pro)ue an a%orti1ation rate o' B.$<6 per %onth per (on) or B./<66
per %onth in total$ Ehen these )i''erent rates o' a%orti1ation are
applie) to the Pre%iu% on Bon)s Pa&a(le on 8an,out3s (ooks an) the
In0est%ent in 8an,out Bon)s aount on Thorn(ill3s (ooks/ the aount
(alanes on0er,e to-ar) the 'ae a%ount o' the (on)s$
Re:uire%ent .
A%orti1ation )ate Months sine a:uisition Cu%ulati0e a%orti1ation
De 2#/ .66A A %onths B#</666
Ot 2#/ .667 #A %onths B;6/666
Ma& 2#/ .66= .2 %onths B<7/<66
No0 26/ .66= .7 %onths B7./<66
The B7</666 pre%iu% on the (on)s as a:uire) (& Thorn(ill -ill (e
a%orti1e) at a rate o' B./<66 per %onth GB7</666 pre%iu%K26
%onths to %aturit&H$ The (alane in the In0est%ent in 8an,out
Bon)s aount -ill (e the ori,inal (alane o' B#/67</666 %inus
the u%ulati0e a%orti1ation a%ounts sho-n a(o0e orC
De 2#/ .66A B#/6A6/666
Ot 2#/ .667 B#/62</666
Ma& 2#/ .66= B#/6#7/<66
No0 26/ .66= B#/66./<66
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*.7
E4erise 7
Preli%inar& o%putationsC
Book 0alue o' (on)s B726/666 4 #K2 O B 2#6/666
Cost o' (on)s 2#7/666
"oss on onstruti0e retire%ent B 7/666

Re:uire%ent #C
Ino%e 'ro% EaterholeC
Share o' Eaterhole3s ino%e GB266/666 4
A6>H
B #=6/666
"essC Construti0e loss GB7/666 4 A6>H G ;/.66 H
PlusC Piee%eal reo,nition o' loss
GB7/666K< &earsH 4 A6> =;6
Ino%e 'ro% Eaterhole B #7A/A;6
Re:uire%ent .C
Minorit& interest ino%eC
Eaterhole3s reporte) ino%e B 266/666
"essC Construti0e loss on (on)s G 7/666 H
PlusC Piee%eal reo,nition o' loss #/;66
E:ualsC A)Juste) reporte) ino%e B .7;/;66
Minorit& perenta,e ;6>
Minorit& interest ino%e B ##7/7A6
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*.=
E4erise #6
Re:uire%ent #
Minorit& interest ino%e BA66/666 4 .6> B #.6/666
Re:uire%ent .
Consoli)ate) net ino%eC
Ino%e 'ro% Eill& Ea,tail3s operations B ;/<66/666
Ino%e 'ro% ?ar)enC
Eill& Ea,tail3s share o' ?ar)en ino%e
O =6> 4 BA66/666 B ;=6/666
A))C Construti0e ,ain on (on)
retire%ent GB;/666/666 N B#.6/666HQ.<>*
7=6/666
<6/666
"essC Piee%eal reo,nition o' ,ain O
B<6/666K= &ears G #./<66 H
<#7/<66
"essC Nonontrollin, interest e4pense
.6> 4 BA66/666 O G #.6/666 H
Consoli)ate) net ino%e B ;/=77/<66
5.667 Pearson E)uation/ In$ pu(lishin, as Prentie 8all
7*.7