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 $910,000. 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

Answer :

Journal Entries

Date	Particulars	Debit	Credit
31-12-2016	Bond Payable	$ 126325
	Interest Income	$13860
	Loss on Retirement of Bond	$99250
	To Investment Income		$228060
	To Interest Exp		$ 11375
	(Being Entry for repurchase of bond)
31-12-2018	Bond Payable	$ 126742
	Interest Income	$ 18360
	Investment in Zeck	$ 98719
	To Investment Income		$ 231605
	To Interest Expenses		$ 12216
	(Being Entry for Consolidation of Bond)

Working Note : 1

Gain on Repurchase of Bond

Cost of Acquisition	$ 231000
Book Value = $ 910000/8	$ 113750
Loss on Repurchase	$ 99250

Interest Balances for 2016

Interest Income   : $ 231000*6% = $ 13860

Interest Expense : $ 113750 *10% = 11375

Investment as on 31^st Dec 2016

Purchase Cost : $ 231000 (A)

Amortisation Cost :

Cash Interest : $ 210000*8% = $16800

Effective Interest Income = $ 13860 = $ 2940

Investment Balance (c ): $231000(A) - $ 2940(B) = $ 228060

Working Note for b :

For 2017

Interest Income : $ 228060* 8% = $ 18245

Interest Exp : $ 126325 *10% = 12633

Investment as on 31 dec 2018

Book Value : $ 228060

Amortisation Cost :

Cash Interest : $ 210000*8% = $ 16800

Effective Interest Income: $ 18245 = ($1445)

Investment Balance: $ 228060 + $ 1445 = $ 229505

Bond Payable

Book Value	$ 126325 (a)
Cash Interest($210000*8%)	$ 16800
Effective Interest Cost	$ 12633   = $ 4167 (b)
Bond Balance as on 2017	$ 122158 (a-b)

For 2017

Interest Income : $ 229505 *8% = $ 18360

Interest Expenses : $ 122158 * 10% = 12216

Investment as on 31 dec 2018

Book Value : $ 229505 (a)

Amortisation Cost :

Cash Interest : $ 210000*8% = $ 16800

Effective Interest Income: $ 18360 = ($1560)

Investment Balance: $ 229505 + $ 1560 = $ 229505 = $231065

Bond Payable

Book Value : $ 122158 (A)

Amortisation Cost :

Cash Interest : $ 210000*8% = $ 16800

Effective Interest Cost : $ 12216 = $4584

Bond Balance as on 31 Dec 2018 : $126742 ($ 122158 + $ 4584)