Question

Several years ago Brant, Inc., sold $1,020,000 in bonds to the public. Annual cash interest of 8 percent ($81,600) 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 $170,000 of these bonds on the open market for $191,000, a price based on an effective interest rate of 6 percent. The bond liability had a carrying amount on that date of $900,000. 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

Part A

Event	date	Consolidating entries	Debit	Credit
Entry B	December 31, 2016	Bonds payable	184400
		Interest income	11460
		Loss on retirement of debt	11000
		Investment in bonds		188860
		Interest expense		18000

Part B

Event	date	Consolidating entries	Debit	Credit
Entry *B	December 31, 2018	Bonds payable	194564
		Interest income	11195
		Investment in Zack		2648
		Investment in bonds		184187
		Interest expense		18924

Explanation

Loss on repurchase of bond

Cost of acquisition	191000
Book value ($900,000 × 1/5)	180000
Loss on repurchase	11000

Interest balances for 2016

Interest income:$191,000× 6%	11460
Interest expense:$180,000 (book value[above]) × 10%	18000

Investment balance, December 31, 2016

Original cost, 1/1/16		191000
Amortization of premium:
Cash interest ($170,000 × 8%)	13600
Effective interest income (above)	11460	2140
Investment, 12/31/16		188860

Bonds payable balance, December 31, 2016

Book value, 1/1/16 (above)		180000
Amortization of discount:
Cash interest ($170,000 × 8%)	13600
Effective interest expense(above)	18000	4400
Bonds payable, 12/31/16		184400

Entry B is used for eliminating intra-entity debt holdings and recognizing loss on retirement.

Interest balances for 2017

Interest income:$188600 × 6%	11332
Interest expense:$184400 (book value[above]) × 10%	18440

Investment balance, December 31, 2017

Original cost, 1/1/17		188600
Amortization of premium:
Cash interest ($170,000 × 8%)	13600
Effective interest income (above)	11332	2268
Investment, 12/31/17		186592

Bonds payable balance, December 31, 2017

Book value, 1/1/17 (above)		184400
Amortization of discount:
Cash interest ($170,000 × 8%)	13600
Effective interest expense(above)	18440	4840
Bonds payable, 12/31/17		189240

Interest balances for 2018

Interest income:$186592 × 6%	11195
Interest expense:$189240 (book value[above]) × 10%	18924

Investment balance, December 31, 2018

Original cost, 1/1/18		186592
Amortization of premium:
Cash interest ($170,000 × 8%)	13600
Effective interest income (above)	11195	2405
Investment, 12/31/18		184187

Bonds payable balance, December 31, 2018

Book value, 1/1/18 (above)		189240
Amortization of discount:
Cash interest ($170,000 × 8%)	13600
Effective interest expense(above)	18924	5324
Bonds payable, 12/31/18		194564

*B is used for eliminating intra-entity bond holdings and adjusting the Investment in Zack for the unrecognized loss on retirement.