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Several years ago Brant, Inc., sold $960,000 in bonds to the public. Annual cash interest of...

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.)

Solutions

Expert Solution

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

ekkarill92 answered 1 year ago
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