Question

At the beginning of year 1, sub sold 5 year at 6% for $1,000,000 bonds with annual interest payment when market was 8%. At the end of the first year, the parent of the sub purchased 80% of these bonds when market was at 3%. Prepare all the necessary journal entries and eliminations for the 5 years, assume interest method was used by sub and parent.

Answer 1

In the books of Sub

Year 1
(Assuming that the bonds were sold for their fair value.)

Bank A/c $920,146
to 6% Debentures ($1,000,000) $920,146

Interest Expense $73,612
to 6% Debentures ($1,000,000) $13,612
to Interest Payable $60,000

Year 2

Interest Expense $74,665
to 6% Debentures ($1,000,000) $14,665
to Interest Payable $60,000

Year 3

Interest Expense $75,838
to 6% Debentures ($1,000,000) $15,838
to Interest Payable $60,000

Year 4

Interest Expense $77,105
to 6% Debentures ($1,000,000) $17,105
to Interest Payable $60,000

Year 5

Interest Expense $79085
to 6% Debentures ($1,000,000) $19085
to Interest Payable $60,000

6% Debentures ($1,000,000) $1,000,000
to Bank $1,000,000

In the books of Parent

Year 2 (Assuming purchase was at the Fair Value)

Investment in 6% Debentures ($800,000) $889,210
to Bank $889,210

Interest Receivable $48,000
to Interest Income $26,676
to Investment in 6% Debentures ($800,000) $21,324

Year 3

Interest Receivable $48,000
to Interest Income $26,037
to Investment in 6% Debentures ($800,000) $21,963

Year 4

Interest Receivable $48,000
to Interest Income $25,378
to Investment in 6% Debentures ($800,000) $22,622

Year 5

Interest Receivable $48,000
to Interest Income $24,699
to Investment in 6% Debentures ($800,000) $23,301

Bank $800,000
to Investment in 6% Debentures ($800,000) $800,000

Eliminations

Year 2-5

Interest Income $48,000
Interest Expense $48,000