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

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

Required:

a. What amount of gain or loss will be reported in Dundee'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 eliminating 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 eliminating entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X9.

8SL-1

Solutions

Expert Solution

a. No gain or loss will be reported.

Book value of liability reported by Dundee:
Par value of bonds outstanding	500000
Unamortized premium [10000 - (10000 / 10 * 3.5)]	6500
Book value of debt	506500
Amount paid by parent	492200
Gain on bond retirement	14300

Gain on bond retirement		14300
Adjustment for excess of interest income over interest expense
Interest income	23100
Interest expense	22000	-1100
Increase in consolidated net income		13200

Account	Debit	Credit
Bonds payable	500000
Premium on bonds payable [(10000 / 10) * 6]	6000
Interest income	23100
Investment in Dundee bonds {492200 + [(7800 / 6.5)/2]}		492800
Interest expense		22000
Gain on bond retirement		14300

Interest payable	22500
Interest receivable		22500

Account	Debit	Credit
Bonds payable	500000
Premium on bonds payable [(10000 / 10) * 5]	5000
Interest income [45000 + (7800 / 6.5)]	46200
Investment in Dundee bonds [492800 + (7800 / 6.5)]		494000
Interest expense [45000 - (10000 / 10)]		44000
Investment in Dundee stock [(14300 - 1100) * 65%]		8580
NCI in NA of Dudee [(14300 - 1100) * 35%]		4620

Interest payable	22500
Interest receivable		22500

ekkarill92 answered 1 year ago

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