Question

Several years ago Brant, Inc., sold $900,000 in bonds to the public. Annual cash interest of 8 percent ($72,000) was to be paid on this debt. The bonds were issued at a discount to yield 12 percent. At the beginning of 2016, Zack Corporation (a wholly owned subsidiary of Brant) purchased $180,000 of these bonds on the open market for $201,000, a price based on an effective interest rate of 6 percent. The bond liability had a carrying amount on that date of $780,000. 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?

1a Prepare Entry B to eliminate the intra-entity debt holdings and to recognize the loss on retirement.

1b Prepare Entry *B to eliminate the intra-entity bond holdings and to adjust the investment in Zack for the unrecognized loss on retirement.

Answer 1

Date	Accounts	Debit	Credit
31.12.16	Bonds payable	160320
	Interest income (201000*0.06)	12060
	Loss on retirement of debt ( 201000 - 780000/5)	45000
	Investment in bonds (201000 - 180000*0.08 + 12060)		198660
	Interest expense (780000/5*0.12)		18720

31.12.18	Bonds payable	170577
	Interest income	11771
	Interest in Zack	31022
	Investment in bonds		193551
	Interest expense		19819

Calculation:-

Interest balances for 2017
Interest income:$198660 × 6%	11920
Interest expense:$160320 × 12%	19238

Investment balance, December 31, 2017
Book value, January 1, 2017		198660
Amortization of premium: Cash interest ($180,000 × 8%)	14400
Effective interest income	11920	2480
Investment, 12/31/17		196180

Bonds payable balance, December 31, 2017
Book value, January 1, 2017		160320
Amortization of premium:Cash interest ($180,000 × 8%)	14400
Effective interest Expense (above)	19238	4838
Bonds payable, 12/31/17		165158

Interest balances for 2018
Interest income:$196180× 6%	11771
Interest expense:$165158× 12%	19819

Investment balance, December 31, 2018
Book value, January 1, 2018		196180
Amortization of premium: Cash interest ($180,000 × 8%)	14400
Effective interest income	11771	2629
Investment, 12/31/18		193551

Bonds payable balance, December 31, 2018
Book value, January 1, 2018		165158
Amortization of premium:Cash interest ($180,000 × 8%)	14400
Effective interest Expense (above)	19819	5419
Bonds payable, 12/31/17		170577

Adjustment needed to investment in Zack for bond retirement loss:

Loss on retirement of debt		45000
Balances currently in retained earnings:
Interest income:
2016	12060
2017	11920	23980
Interest expense:
2016	18720
2017	19238	(37958)
Adjustment needed to Investment in Zack		$31022

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