Question

Several years ago Brant, Inc., sold $1,050,000 in bonds to the public. Annual cash interest of 8 percent ($84,000) 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 $210,000 of these bonds on the open market for $231,000, 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

a.The consolidation entry should be prepared by debiting the bonds payable, interest income,

loss on retirement on bonds, and making a credit to investment in bonds and credit to interest expense.

Date	Account title and explanation	Debit($)	Credit($)
31 dec 2016	Bonds Payable	181,200
	Interest income	13,860
	Loss on retirement	51,000
	Investment in bonds		228,060
	Interest expense		18,000
	(To record the consolidation entry for bonds)

Working notes:

Interest income=Price paid for bonds× Effective interest rate

                            =$231,000 × 6%

                            =$13,860

Interest expense=Book value of bond × interest rate on date of issue

                             =(900000÷5)×10%

                             =$18,000

Loss on repurchase of bond

Cost of acquisition                                                 $231,000

Book value ($900,000 × 1/5) =                          $ 180,000

Loss on repurchase/retirement                     $ 51,000

Investment balance, December 31, 2016

Original cost, 1/1/16                                                    $231,000

Amortization of premium:

Cash interest

($210,000 × 8%)                                   $16,800

Effective interest income(above) $13,860            $ 2,940

Investment, 12/31/16                                               $228,060

Bonds payable balance, December 31, 2016

Book value, 1/1/16 (above)                                         $180,000

Amortization of discount:

Cash interest ($210,000 × 8%)              $16,800

Effective interest expense (above)$18,000          $1200

Bonds payable, 12/31/16                                          $181,200

b.	Date	Account title and explanation	Debit($)	Credit($)
	31-Dec-18	Bonds Payable	$ 183,972
		Interest income	13,497
		investment in Zack(Balancing figure)	42,424
		Investment in bonds		$221,641
		Interest expense		18,252
	Working notes:
	For 2017
	Interest income:
	Interest income=Investment balance of bonds for the year× Effective interest rate
	=$228,060 × 6% (rounded)
	=$13,684
	Interest expense=liability balance for the year × interest rate on date of issue
	=181200×10%
	=$18,120
	Investment balance, December 31, 2017
	Original cost, 1/1/17                                                    $231,000			$228,060
	Amortization of premium:
	Cash interest
	($210,000 × 8%)                                   $16,800
	Effective interest income(above) $13,684            $ 2,940			$                                 3,116
	Investment, 12/31/17                                              $228,060			$224,944
	Bonds payable balance, December 31, 2017
	Book value, 1/1/17 (above)                                         $180,000			$                             181,200
	Amortization of discount:
	Cash interest ($210,000 × 8%)              $16,800
	Effective interest expense (above)$18,120           $1200			1320
	Bonds payable, 12/31/17                                          $181,200			$                             182,520
	For 2018
	Interest income:
	Interest income=Investment balance of bonds for the year× Effective interest rate
	=$224,944 × 6% (rounded)
	=	$13,497
	Interest expense=liability balance for the year × interest rate on date of issue
	=182520×10%
	=$18,252
	Investment balance, December 31, 2018
	Original cost, 1/1/18                                                    $231,000			$224,944
	Amortization of premium:
	Cash interest
	($210,000 × 8%)                                   $16,800
	Effective interest income(above) $13,497           $ 2,940			$                                 3,303
	Investment, 12/31/18                                              $228,060			$221,641
	Bonds payable balance, December 31, 2018
	Book value, 1/1/18 (above)                                         $180,000			$                             182,520
	Amortization of discount:
	Cash interest ($210,000 × 8%)              $16,800
	Effective interest expense (above)$18,252           $1200			1452
	Bonds payable, 12/31/18                                         $181,200			$                             183,972