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Pepper Enterprises owns 95 percent of Salt Corporation. On January 1, 20X1, Salt issued $200,000 of...

Pepper Enterprises owns 95 percent of Salt Corporation. On January 1, 20X1, Salt issued $200,000 of five-year bonds at 115. Annual interest of 12 percent is paid semiannually on January 1 and July 1. Pepper purchased $100,000 of the bonds on July 1, 20X3, at par value. The following balances are taken from the separate 20X3 financial statements of the two companies:  

Pepper Enterprises Salt Corporation
Investment in Salt Corporation Bonds $ 100,000
Interest Income 6,000
Interest Receivable 6,000
Bonds Payable $ 200,000
Bond Premium 13,475
Interest Expense 18,039
Interest Payable 12,000

Required:
a. Compute the amount of interest expense that should be reported in the consolidated income statement for 20X3. (Do not round your intermediate calculations. Round your final answer to nearest whole dollar.)
b. Compute the gain or loss on constructive bond retirement that should be reported in the 20X3 consolidated income statement. (Do not round your intermediate calculations. Round your final answer to nearest whole dollar.)
c. Prepare the consolidation worksheet consolidation entry or entries as of December 31, 20X3, to remove the effects of the intercorporate bond ownership. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round your intermediate calculations. Round your final answers to nearest whole dollar.)

Solutions

Expert Solution

Part A

Interest expense

$15000

Par value of bonds outstanding

200000

Annual interest rate

X 12%

Interest payment

24000

Amortization of bonds premium (200000*15%)/5

(6000)

Interest charge for full year

18000

Less: Interest on bond purchased by Online Enterprises (18000*1/2)*(4 months / 12 months)

(3000)

Interest expense included in the consolidated income statement

15000

Part B

Gain

On bond retirement

$7000

Sale price of bonds, January 1, 20x1 (100000*115%)

115000

Amortization of premium ($(100000*15%) / 5yrs) x 2 2/3 years)

(8000)

Book value at time of purchase

107000

Purchase price

100000

Gain on bond retirement

7000

Part 3

Events

Accounts

debit

credit

1

Bonds payable

100000

Bond premium

6000

Interest income

4000

Investment in Salt bonds

100000

Interest expense

3000

Gain on bond retirement

7000

(to record elimination of the intercompany ownership)

2

Interest payable (3000+7000-4000)

6000

Interest receivable

6000

(to record elimination of interest receivables/payables)

ekkarill92 answered 1 year ago
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