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Example 8.1: Intercompany Loans from Palm (the parent company) to Starr (the subsidiary) (Contd.) In the working paper for consolidated financial statements for Palm and subsidiary for the year ended 12/31/2001, the foregoing ledger accounts appear as shown below: Example 8.1: Intercompany Loans from Palm (the parent company) to Starr (the subsidiary) (Contd.)
*45,000 + $1,100 = $46,100 If an intercompany note receivable is discounted at a bank (by the payee, i.e., Palm in example 8.1), the note becomes payable to an outsider – the bank. Therefore, discounted intercompany notes are not eliminated in the working paper. Example 8.2: Discounting of Intercompany Notes Continued with Example 8.1 and Assumed that on 12/1/2001, Palm had discounted at a 12% discount rate the $24,000 note receivable from Starr. Palm would record the following entry: Cash 23,940 Interest Expense ($1,260 discount – 1,000*) 260 Intercompany Notes Receivable 24,000 Intercompany Interest Revenue 200 ($24,000 x 0.10 x 1/12) Example 8.2: Discounting of Intercompany Notes (Contd.)
To record discounting of 10%,six-month note receivable from Starr Company dated Nov. 1,2001, at a discount rate of 12%. Cash proceeds are computed as follows: [$24,000 + ($24,000 x 0.10 x 6/12)] Less: Discount ($25,200 x 0.12 x 5/12) *Interest on note that accrues to discounting bank during discounting period. Example 8.2: Discounting of Intercompany Notes (Contd.) Palm should inform Starr of the discounting. Starr would prepare the following journal entry on 12/1/2001:
Intercompany Notes Payable To transfer 10%, six-month note payable to Palm Corporation dated Nov. 1, 2001, from intercompany notes to outsider notes. Example 8.2: Discounting of Intercompany Notes (Contd.) Under the note discounting assumption, the ledger accounts related to the intercompany notes would appear in the 12/31/2001 working paper for consolidated financial statements as follows: Example 8.2: Discounting of Intercompany Notes (Contd.) PALM CORPORATION AND SUBSIDIARY Partial Working Paper for Consolidated Financial Statements For Year Ended December 31, 2001
*$200 less than in illustration on page 348 because $24,000 discounted note earned interest for one month rather than two months. † $21,000 note dated Sept. 1, 2001, plus $700 accrued interest. Leases of Property under Operating Leases When both the parent and subsidiary account the lease as an operating lease, the lessee will record the lease payment as intercompany rent expense, while the lessor will record the lease payment received as intercompany rent revenue. Leases of Property under Operating Leases (Contd.) For an intercompany operating lease, there is no profit or loss involved. The inercompany rent revenue would be offset against intercompany rent expense in the manner similar to the offset of intercompany interest revenue and expense illustrated earlier.
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