Question

In: Accounting

Sydney Company issued $1,000,000 par value 10-year bonds at 102 on January 1, 20X5, which Melbourne...

Sydney Company issued $1,000,000 par value 10-year bonds at 102 on January 1, 20X5, which Melbourne Corporation purchased. The coupon rate on the bonds is 9 percent. Interest payments are made semiannually on July 1 and January 1. On Jan 1, 20X8, Perth Company purchased $500,000 par value of the bonds from Melbourne for $492,200. Perth owns 65 percent of Sydney's voting shares.

a. What amount of gain or loss will be reported in Sydney's 20X8 income statement on the retirement of bonds?

b. Will a gain or loss be reported in the 20X8 consolidated financial statements for Perth for the constructive retirement of bonds? What amount will be reported?

c. How much will Perth's purchase of the bonds change consolidated net income for 20X8?

d. Prepare the worksheet consolidating entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X8.

e. Prepare the worksheet consolidating entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X9.

Expert Solution

Answer:-

a.

No gain or loss will be reported.

b.

Book estimation of obligation announced by Dundee:

Standard estimation of bonds remarkable 500000

Unamortized premium

[10000 - (10000/10 * 3.5)] 6500

Book estimation of obligation : 506500

Sum paid by parent : 492200

Increase on bond retirement : 14300

c.

Increase on bond retirement : 14300

Alteration for abundance of intrigue pay over intrigue cost

Intrigue pay : 23100

Intrigue cost : 22000 - 1100

Increment in united net gain : 13200

d.

Record Charge Credit

Bonds payable : 500000

Premium on bonds payable

= [(10000/10) * 6] 6000

Intrigue salary : 23100

Interest in Dundee bonds

= {492200 + [(7800/6.5)/2]} 492800

Intrigue cost : 22000

Addition on bond retirement : 14300

Intrigue payable : 22500

Intrigue receivable : 22500

e.

Record Charge Credit

Bonds payable : 500000

Premium on bonds payable

= [(10000/10) * 5] 5000

Intrigue salary

= [45000 + (7800/6.5)] 46200

Interest in Dundee bonds

= [492800 + (7800/6.5)] 494000

Intrigue cost

= [45000 - (10000/10)] 44000

Interest in Dundee stock

= [(14300 - 1100) * 65%] 8580

NCI in NA of Dundee

= [(14300 - 1100) * 35%] 4620

Interest payable 22500.

Interest receivable 22500.

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