Question

Cairns owns 75 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, 2014, Hamilton sold $2,600,000 in 10-year bonds to the public at 105. The bonds had a cash interest rate of 9 percent payable every December 31. Cairns acquired 40 percent of these bonds at 96 percent of face value on January 1, 2016. Both companies utilize the straight-line method of amortization.

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

1. December 31, 2016

2. December 31, 2017

3. December 31, 2018

Answer 1

Answer:

a. Dec 31,2016

Event	General Journal	Debit	Credit
Entry B	Bonds payable(2600,000×40%)	$1,040,000
	Premium on bonds payable(13000×40%×7)	$36,400
	Interest income	$98,800
	Investment in Bonds		$1,003,600
	Interest Expense		$88,400
	Gain on retirement of bonds		$83,200

b. Dec 31, 2017.

Event	General Journal	Debit	Credit
Entry B	Bonds payable(2600,000×40%)	$1,040,000
	Premium on bonds payable(13,000×40%×6)or (-5200)	$31,200
	Interest income	$98,800
	Investment in Bonds(+5200)		$1,008,800
	Interest Expense		$88,400
	Investment in Hamitton(Balance amount)		$72,800

C. Dec 31,2018

Event	General Journal	Debit	Credit
Entry B	Bonds payable(2600,000×40%)	$1,040,000
	Premium on bonds payable(-5200)	$26,000
	Interest income	$98,800
	Investment in Bonds(+5200)		$1,014,000
	Interest Expense		$88,400
	Investment in Hamitton(balancing figure)		$62,400

Explanation:

a.

Book value of bonds payable on January 2016:

Book value , jan 1, 2011=$2,730,000

Amortisation-2011,2012{(1,300,000/10)×2}=$26,000

Book value of bonds payable, jan 1,2013=$2,704,000

Book value of 40% bonds payable(intra entity portion) jan 1, 2013=$1,081,600

Gain on retirement of bonds, jan 1, 2016:

Purchase price(1040,000×96%)=$998,400

Book value of liability (above)=$1,081,600

Gain on retirement of bonds=$83,200

Book value of bonds payable Dec 31,2016:

Book value , jan 1,2013(above)=$2,704,000

Amortisation for 2013=$13,000

Book value of bonds payable Dec 31,2013=$2,691,000

Book value of 40% bonds payable(intra entity portion) Dec 31,2013=$1,076,400

Book value of Investment, Dec 31,2016:

Book value of Investment, jan 1,2016(purchase price)=₹

$998,400

Amortisation for 2013($41,600 discount/8 years remaining life=$5,200

Book value of Investment, Dec 31,2016=$1,003,600

Intra entity interest balances for 2016:

Interest Expense:

Cash payment(1040,000×9%)=$93,600

Amortisation of premium for 2016($13,000per year×40% intra entity portion)=$5,200

Intra entity interest expense=$88,400

Interest income:

Cash collection(1040,000×9%)=$93,600

Amortisation of discount for 2016(above)=$5,200

Intra entity interest income=$98,800

b.

In 2017,