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On January 1, 2007, Gild Company acquired 60 percent of the outstanding common stock of Leeds Company at the book value of the shares acquired. On that date, the fair value of non-controlling interest was equal to 40 percent of book value of Leeds. At the time of purchase, Leeds had common stock of $1,000,000 outstanding and retained earnings of $800,000. On January 1, 2008, Gild purchased 100% of Leeds's bonds outstanding. This debt was originally issued on January 1, 2004, at 103. The total bond issue has a face value of $600,000, pays 10 percent interest semi-annually, and has a 10-year maturity. Any premium or discount is amortized using the effective interest method. Gild paid $588,000 for its 100% investment in Leeds's bonds and intends to hold the bonds until maturity. Assume Gild accounts for its investment in Leeds stock using the fully adjusted equity method. Required: 1. Compute the gain from the purchase of Leeds's debt. 2. Present the worksheet entries necessary to eliminate intercompany debt and intercompany receivables/payables for 2008. 3. Present the worksheet entries necessary to eliminate intercompany debt and intercompany receivables/payables for 2009. Leeds issue of debt Face Bond Value Amount 1.03 600,000 618000 Face Rate Effective Rate 10% 9.53% Semi-Annual Date Payment Interest Amortizat Premium Bond value 1/1/2004 -18,000 618,000 7/1/2004 30,000 29,442 558 -17,442 617,442 1/1/2005 30,000 29,415 585 -16,857 616,857 7/1/2005 30,000 29,387 613 -16,245 616,245 1/1/2006 30,000 29,358 642-15,603 615,603 7/1/2006 30,000 29,328 672 -14,931 614,931 1/1/2007 30,000 29,296 704 -14,226 614,226 7/1/2007 30,000 29,262 738 -13,488 613,488 1/1/2008 30,000 29,227 773 -12,715 612,715 7/1/2008 30,000 29,190 810 -11,906 611,906 1/1/2009 30,000 29,152 8 48 -11,057 611,057 7/1/2009 30,000 29,111 889 -10,168 610,168 1/1/2010 30,000 29,069 931 -9,237 609,237 7/1/2010 30,000 29,024 -8,262 608,262 1/1/2011 30,000 28,978 1,022 -7,240 607,240 7/1/2011 30,000 28,929 1,071 -6,169 606,169 1/1/2012 30,000 28,878 1,122 -5,047 605,047 7/1/2012 30,000 28,825 1,175 -3,872 603,872 1/1/2013 30,000 28,769 1,231 -2,641 602,641 7/1/2013 30,000 28,710 1,290 -1,351 601,351 1/1/2014 30,000 28,649 1,351 0 600,000 Gild purchase of leeds debt Face Bond Amount Value 98 600,000 Face Rate Effective Rate 824 10% 10.46% Semi-Annual Date Payment Interest Amortizati Discount Bond value 1/1/2008 588,000 7/1/2008 30,000 30,744 744 588,744 1/1/2009 30,000 30,783 783 589,527 7/1/2009 30,000 30,824 590,351 1/1/2010 30,000 30,867 867 591,218 7/1/2010 30,000 30,912 912 592,130 1/1/2011 30,000 30,960 960 593,090 7/1/2011 30,000 31,010 1,010 594,100 1/1/2012 30,000 31,063 1,063 595,163 7/1/2012 30,000 31,119 1,119 596,282 1/1/2013 30,000 31,177 1,177 597,459 7/1/2013 30,000 31,239 1,239 598,697 1/1/2014 30,000 31,303 1,303 600,001 Gild purchase of leeds debt Face Bond Amount Value 600,000 Face Rate Effective Rate 10% 10.46% Semi-Annual Date Payment Interest Amortizati Discount Bond value 1/1/2008 588,000 7/1/2008 30,000 30,744 588,744 1/1/2009 30,000 30,783 783 589,527 7/1/2009 30,000 30,824 824 590,351 1/1/2010 30,000 30,867 867 591,218 7/1/2010 30,000 30,912 592,130 1/1/2011 30,000 30,960 593,090 7/1/2011 30,000 31,010 1,010 594,100 1/1/2012 30,000 31,063 1,063 595,163 7/1/2012 30,000 31,119 1,119 596,282 1/1/2013 30,000 31,177 1,177 597,459 7/1/2013 30,000 31,239 1,239 598,697 1/1/2014 30,000 31,303 1,303 600,001 744 912 960 On January 1, 2007, Gild Company acquired 60 percent of the outstanding common stock of Leeds Company at the book value of the shares acquired. On that date, the fair value of non-controlling interest was equal to 40 percent of book value of Leeds. At the time of purchase, Leeds had common stock of $1,000,000 outstanding and retained earnings of $800,000. On January 1, 2008, Gild purchased 100% of Leeds's bonds outstanding. This debt was originally issued on January 1, 2004, at 103. The total bond issue has a face value of $600,000, pays 10 percent interest semi-annually, and has a 10-year maturity. Any premium or discount is amortized using the effective interest method. Gild paid $588,000 for its 100% investment in Leeds's bonds and intends to hold the bonds until maturity. Assume Gild accounts for its investment in Leeds stock using the fully adjusted equity method. Required: 1. Compute the gain from the purchase of Leeds's debt. 2. Present the worksheet entries necessary to eliminate intercompany debt and intercompany receivables/payables for 2008. 3. Present the worksheet entries necessary to eliminate intercompany debt and intercompany receivables/payables for 2009. Leeds issue of debt Face Bond Value Amount 1.03 600,000 618000 Face Rate Effective Rate 10% 9.53% Semi-Annual Date Payment Interest Amortizat Premium Bond value 1/1/2004 -18,000 618,000 7/1/2004 30,000 29,442 558 -17,442 617,442 1/1/2005 30,000 29,415 585 -16,857 616,857 7/1/2005 30,000 29,387 613 -16,245 616,245 1/1/2006 30,000 29,358 642-15,603 615,603 7/1/2006 30,000 29,328 672 -14,931 614,931 1/1/2007 30,000 29,296 704 -14,226 614,226 7/1/2007 30,000 29,262 738 -13,488 613,488 1/1/2008 30,000 29,227 773 -12,715 612,715 7/1/2008 30,000 29,190 810 -11,906 611,906 1/1/2009 30,000 29,152 8 48 -11,057 611,057 7/1/2009 30,000 29,111 889 -10,168 610,168 1/1/2010 30,000 29,069 931 -9,237 609,237 7/1/2010 30,000 29,024 -8,262 608,262 1/1/2011 30,000 28,978 1,022 -7,240 607,240 7/1/2011 30,000 28,929 1,071 -6,169 606,169 1/1/2012 30,000 28,878 1,122 -5,047 605,047 7/1/2012 30,000 28,825 1,175 -3,872 603,872 1/1/2013 30,000 28,769 1,231 -2,641 602,641 7/1/2013 30,000 28,710 1,290 -1,351 601,351 1/1/2014 30,000 28,649 1,351 0 600,000 Gild purchase of leeds debt Face Bond Amount Value 98 600,000 Face Rate Effective Rate 824 10% 10.46% Semi-Annual Date Payment Interest Amortizati Discount Bond value 1/1/2008 588,000 7/1/2008 30,000 30,744 744 588,744 1/1/2009 30,000 30,783 783 589,527 7/1/2009 30,000 30,824 590,351 1/1/2010 30,000 30,867 867 591,218 7/1/2010 30,000 30,912 912 592,130 1/1/2011 30,000 30,960 960 593,090 7/1/2011 30,000 31,010 1,010 594,100 1/1/2012 30,000 31,063 1,063 595,163 7/1/2012 30,000 31,119 1,119 596,282 1/1/2013 30,000 31,177 1,177 597,459 7/1/2013 30,000 31,239 1,239 598,697 1/1/2014 30,000 31,303 1,303 600,001 Gild purchase of leeds debt Face Bond Amount Value 600,000 Face Rate Effective Rate 10% 10.46% Semi-Annual Date Payment Interest Amortizati Discount Bond value 1/1/2008 588,000 7/1/2008 30,000 30,744 588,744 1/1/2009 30,000 30,783 783 589,527 7/1/2009 30,000 30,824 824 590,351 1/1/2010 30,000 30,867 867 591,218 7/1/2010 30,000 30,912 592,130 1/1/2011 30,000 30,960 593,090 7/1/2011 30,000 31,010 1,010 594,100 1/1/2012 30,000 31,063 1,063 595,163 7/1/2012 30,000 31,119 1,119 596,282 1/1/2013 30,000 31,177 1,177 597,459 7/1/2013 30,000 31,239 1,239 598,697 1/1/2014 30,000 31,303 1,303 600,001 744 912 960

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