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.)

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 (180001/2)(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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Pepper Enterprises owns 95 percent of Salt Corporation. On January 1, 20X1, Salt issued $200,000 of...

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