Question

Pat Inc. purchased the $100,000 face value outstanding bonds of Slinger Company, its 80%-owned subsidiary, for $97,000 on January 1, 20X3. The bonds mature on January 1, 20X6. The bonds have a stated interest rate of 8% and were sold for $101,000 on January 1, 20X1. The bonds pay interest each January 1. Amortization of the issue premium and /or discount will be on the straight-line basis. Instruction:

1. Record the entries Slinger Company would make on its books for 20X3

2. Record the entries Pat Inc. would make on its books for 20X3

Answer 1

1. Journal entry in the books of slinger company on 20X3 :-

a) Being bonds issued at discount

Date	Particulars	Debit ($)	Credit ($)
Jan 1	Bank A/C	97,000
	Discount on issue of Bonds A/C	3,000
	To Bonds A/C		100,000

b) Amortization of discount on issue of bonds and transferred to statement of profit or loss A/C

Date	Particulars	Debit ($)	Credit ($)
Dec 31	statement of profit or loss A/C	1,000
	To Discount on issue of Bonds A/C		1,000

Life of bonds is 3 years and company follows straight line basis for amortization, therefore $3,000/3 = $1,000

2. Journal entry in the books of PAT Inc. on 20X3 :-

a) Being investment made in bonds

Date	Particulars	Debit ($)	Credit ($)
Jan 1	Investment in bonds A/C	97,000
	To Bank A/C		97,000

b) Being interest receivable from bonds will be accrued

Date	Particulars	Debit ($)	Credit($)
Dec 31	Interest receivable A/C	8,000
	To Interest income A/C		8,000

Interest = $100,000 * 8% = $8,000

Next year when on Jan 1 interest will be received then entry will be

Bank A/c .... Debit

To Interest Receivable A/C