Question

Several years ago Brant, Inc., sold $960,000 in bonds to the public. Annual cash interest of 7 percent ($67,200) was to be paid on this debt. The bonds were issued at a discount to yield 10 percent. At the beginning of 2016, Zack Corporation (a wholly owned subsidiary of Brant) purchased $120,000 of these bonds on the open market for $141,000, a price based on an effective interest rate of 5 percent. The bond liability had a carrying amount on that date of $820,000. Assume Brant uses the equity method to account internally for its investment in Zack.

a. & b. What consolidation entry would be required for these bonds on December 31, 2016 and December 31, 2018? (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate answers to nearest whole number.)

Answer 1

	Book Value	102500	= 820000*120000/960000
	Loss on Repurchase	38500	= 141000-102500
	For the Year ended Dec 2016
	Interest Income	7050	= 141000*5%
	Interest Expense	10250	= 102500*10%
	Cash Interest	8400	= 120000*7%
	Premium Amortization	1350	= 8400-7050
	Investment	139650	= 141000-1350
	Discount Amortization	1850	= 10250-8400
	Bonds Payable	104350	= 102500+1850
	Journal Entry for Entry B
12/31/2016	Bonds Payable	104350
	Interest Income	7050
	Loss on Retirement of Debts	38500
	Investment in Bonds		139650
	Interest Expense		10250
	For the Year ended Dec 2017
	Interest Income	6983	= 139650*5%
	Interest Expense	10435	= 104350*10%
	Book Value 1/1/2017	139650
	Premium Amortization	1417	= 8400-6983
	Investment Balance 12/31/2017	138233
	Book Value 1/1/2017	104350
	Discount Amortization	2035	= 10435-8400
	Bonds Payable Balance 12/31/2017	106385
	For the Year ended Dec 2018
	Interest Income	6912	= 138233*5%
	Interest Expense	10639	= 106385*10%
	Book Value 1/1/2018	138233
	Premium Amortization	1488	= 8400-6912
	Investment Balance 12/31/2018	136745
	Book Value 1/1/2018	106385
	Discount Amortization	2239	= 10639-8400
	Bonds Payable Balance 12/31/2018	108624
	Loss on Retirement of Debts	38500
	Interest Income	13895	= 6983+6912
	Interest Expense	-21074	= -10435-10639
	Consolidated Total	31321
	Journal Entry for Entry B
12/31/2018	Bonds Payable	108624
	Interest Income	6912
	Loss on Retirement of Debts	31321
	Investment in Bonds		136745
	Interest Expense		10639