Question

Able Company issued $630,000 of 8 percent first mortgage bonds on January 1, 20X1, at 104. The bonds mature in 20 years and pay interest semiannually on January 1 and July 1. Prime Corporation purchased $420,000 of Able’s bonds from the original purchaser on December 31, 20X5, for $416,000. Prime owns 70 percent of Able’s voting common stock.

Required:

a. Prepare the worksheet consolidation entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements for 20X5. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your market rate of interest to 3 decimals. For example, .0547523 should be rounded to 5.475%.)

b. Prepare the worksheet consolidation entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements for 20X6. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your market rate of interest to 3 decimals. For example, .0547523 should be rounded to 5.475%.)

Answer 1

Events	Accounts	Debit	Credit
a)	Bonds Payable	$420,000.00
	Premium on Bonds Payable*	$12,600.00
	Investment in Able Company Bonds		$416,000.00
	Gain on Bond Retirement (balancing)		$16,600.00
	* [($420,000 x 1.04) - $420,000] x 15/20
	Interest Payable	$16,800.00
	Interest Receivable		$16,800.00
	($420,000 x 8%/2)
b)	Bonds Payable	$420,000.00
	Premium on Bonds Payable $12,600 - [$12,600 / (15 x 2)] x 2	$11,760.00
	Interest Income ($420,000 x 8% ) + (($16,600 -$12,600)/(15 x 2)) x 2	$33,866.67
	Investment in Able Company Bonds ($416,000 +( ($16,600 - $12,600)/(15 x 2)) x2		$416,266.67
	Interest Expense ($16800 - ($12,600/15 x 2) x2		$32,760.00
	Investment in Able Co. ($16,600 x 70%)		$11,620.00
	NCI in NA of Able Co. ($16,600 x 30%)		$4,980.00
	Interest Payable	$16,800.00
	Interest Receivable		$16,800.00
	($420,000 x 8%/2)