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Advanced Accounting: Platte Co., River Co., Kim Corp. consolidations

1. On 1/1/02, Platte acquired 80% of River Co. The purchase resulted in a differential of $120,000, half of which was assigned to a patent and the other half assigned to inventory. The patent is being amortized over a 5 year period. The inventory was sold during 2002 to an unrelated party.

During 2002, River sold to Platte inventory for $1,000,000. The inventory cost River
$700,000. By 12/31/02, ¼ of this inventory was still held by Platte, and was sold to unrelated parties in 2003. Both companies use perpetual systems.

The results of operations for 2002 are as follows:

Platte $1,750,000
River 1,100,000
Total $2,850,000

Required:
a. Give the entry needed to eliminate the effects of the intercompany inventory transfer for 2002.
b. Compute 2002 Consolidated Income
c. Compute income to Minority Interest for 2002.
d. Give entry needed for 2003 to eliminate the effects of the 2002 inventory transfer.
e. Give the entries needed for 2002 and 2003 to eliminate the effects of the intercompany transfer of inventory assuming the use of periodic systems.

a. Sales 1,000,000
COGS 925,000
Inventory 75,000

b. Plate's income 1,750,000
Amortization of patent (12,000)
Platte's consolidated income 1,738,000
River's income 1,100,000
Less: unrealized profit (75,000)
1,025,000
Platte's share x .80 820,000
Consolidated income 2,558,000

c. River's income 1,100,000
Minority portion x .20
Income to minority interest 220,000

d. No entry is required.

e. ? I don't know which entry would be appropriate one.

2. On 7/1/96, Kim Corp. purchased bonds of Locke Co., its 80% owned subsidiary. The bonds were purchased directly from Locke. The face value of the bonds was $1,000,000, with a 12% nominal rate and a 10 year maturity. The bonds were issued at 103. Interest is payable semiannually at 1/1 and 7/1. Both companies use SL amortization. On 1/1/04, Locke retired ½ of the bonds at par.

a. Give the elimination entries related to this debt appearing for 1996.
b. Give the elimination entries related to this debt appearing for 2004.

a. Bonds payable 1,000,000
Premium on bonds 28,500
Investment in Locke 1,028,000

Interest income 58,500
Interest expense 58,500

Interest payable 60,000
Interest receivable 60,000

b. Bonds payable 500,000
Loss on retirement of bonds 18,750
Discount on bonds payable 3,750
Investment in Locke 515,000

Bonds payable 500,000
Interest income 58,500
Retained earnings 15,000
Minority interest 3,750
Discount on bonds payable 2,250
Investment in Locke's bonds 513,500
Interest expense 61,500

Interest payable 60,000
Interest receivable 60,000

3. On 1/1/02, Gild Co. purchased 60% of Leeds Co. at Book Value. At the time of acquisition, Leeds has stock of $1,000,000, and retained earnings of $800,000.

On 12/31/02, Gild bought 50% of Leeds' bonds outstanding which had been issued on
1/2/99, at 99. The total issue has a Face Value of $600,000, pays a nominal rate of 10%
annually, and has a 10 year maturity. Leeds uses a SL method for amortization. Gild paid
$306,000 for the bonds and will hold them until maturity.

Income and dividends for 2002 and 2003 are as follows:

Gild Leeds
Income Dividends Income Dividends
2002 $1,600,000 $400,000 $600,000 $300,000
2003 1,200,000 400,000 1,000,000 300,000

a. Present the elimination entries for 2002 and 2003, assuming the cost method is used by Gild.
b. Present the elimination entries for 2002 and 2003, assuming the equity method is used by Gild.

a. 2002 E1 Dividend income 180,000
Dividend declared 180,000
E2 Income to minority interest 236,880
Dividends declared 120,000
Minority interest 116,880
E3 Common stock-Leeds 1,000,000
Retained earnings, 1/1, 800,000
Investment in Leeds 1,080,000
Minority interest 720,000
E4 Bonds payable 300,000
Loss on retirement 7,800
Discount on bonds payable 1,800
Investment in Leeds 306,000
a. 2003 E1 Dividend income 180,000
Dividend declared 180,000
E2 Income to minority interest 397,400
Dividends declared 120,000
Minority interest 277,400
E3 Common stock-Leeds 1,000,000
Retained earnings, 1/1, 800,000
Investment in Leeds 1,080,000
Minority interest 720,000
E4 Retained earnings, 1/1,
Minority interest
E5 Bonds payable 300,000
Retained earnings, 1/1, 7,680
Interest income 29,000
Minority interest 3,120
Interest expense 30,300
Investment in Leeds 305,000
Discount on bonds 1,500

b. 2002 E1 Income from subsidiary 360,000
Dividends declared 180,000
Investment in Leeds 180,000
E2 Income to minority interest 236,880
Dividends declared 120,000
Minority interest 116,880
E3 Common stock-Leeds 1,000,000
Retained earnings, 1/1, 800,000
Investment in Leeds stock 1,080,000
Minority interest 720,000
E4 Bonds payable 300,000
Loss on retirement 7,800
Investment in Leeds bonds 306,000
Discount on bonds payable 1,800

b. 2003 E1 Income from subsidiary 600,000
Dividends declared 180,000
Investment in Leeds stock 420,000

E2 Income to minority interest 397,400
Dividends declared 120,000
Minority interest 277,400
E3 Common stock-Leeds 1,000,000
Retained earnings, 1/1, 1,100,000
Investment in Leeds stock 1,260,000
Minority interest 840,000
E4 Bonds payable 300,000
Interest income 29,000
Retained earnings 4,680
Minority interest 3,120
Discount on bonds payable 1,500
Investment in Leeds bonds 305,000
Interest expense 30,300

4. On 1/1/01, Dale Industries issued $800,000 of 10 year bonds with a coupon rate of 7%, to unrelated parties at 103. Interest is paid on 6/30 and 12/31. Dale's subsidiary, Martin Tech, acquired the bonds at 97 on 7/1/03, and plans to hold them to maturity. The straight line method of amortizing premiums/discounts is used.

a. Compute the gain/loss from constructive retirement that should be recognized in the consolidated income statement for 2003
b. Prepare all eliminating entries related to intercompany debt that would appear in the work papers to prepare consolidated financial statements for 2003 and 2004.

a. Book Value of Dale's bonds 818,000
Price paid by Martin (776,000)
Gain on retirement of bonds 42,000

b. 2003 Bonds payable 800,000
Premium on bonds payable 16,800
Interest income 28,000
Investment in Dale's bonds 776,000
Interest expense 26,800
Gain on bonds 42,000

2004 Bonds payable 800,000
Premium on bonds payable 14,400
Interest income 58,400
Investment in Dale's bonds 778,400
Interest expense 54,200
Retained earnings 40,200

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Solution Summary

The required entries are shown for you.

$2.19