Question

Cairns owns 80 percent of the voting stock of Hamilton, Inc.

The parent's interest was acquired several years ago on the date that the subsidiary was formed.

Consequently, no goodwill or other allocation was recorded in connection with the acquisition.

Cairns uses the equity method in its internal records to account for its investment in Hamilton.

On January 1, 2011, Hamilton sold $1,300,000 in 10-year bonds to the public at 105.

The bonds had a cash interest rate of 8 percent payable every December 31.

Cairns acquired 40 percent of these bonds at 96 percent of face value on January 1, 2013.

Both companies utilize the straight-line method of amortization.

Required:

Prepare the consolidation worksheet entries to recognize the effects of the intra-entity bonds at each of the following dates:

a) January 1, 2011.

b) December 31, 2011.

c) December 31, 2012.

d) January 1, 2013.

Answer 1

In th books of Hamilton

In th books of Cairns

Consolidated Sheet

01-Jan-11

Bank A/c

Debit

$       13,65,000

No Entry

No Entry

To 10-year bond

Credit

$ 13,00,000

To Security premium

Credit

$       65,000

(Being Bonds issue)

31-Dec-11

Interest Expense

Debit

$         1,04,000

No Entry

No Entry

To Bank

Credit

$    1,04,000

(Being Interest paid on bond)

31-Dec-12

Interest Expense

Debit

$         1,04,000

No Entry

No Entry

To Bank

Credit

$    1,04,000

(Being Interest paid on bond)

01-Jan-13

Investment Bonds A/c

Debit

$       4,99,200

Effect given to purchase consideration

To Bank A/c

$ 4,99,200

(Being investment made)