In: Accounting
Several years ago Brant, Inc., sold $1,050,000 in bonds to the public. Annual cash interest of 8 percent ($84,000) was to be paid on this debt. The bonds were issued at a discount to yield 10 percent. At the beginning of 2016, Zack Corporation (a wholly owned subsidiary of Brant) purchased $210,000 of these bonds on the open market for $231,000, a price based on an effective interest rate of 6 percent. The bond liability had a carrying amount on that date of $900,000. Assume Brant uses the equity method to account internally for its investment in Zack.
a. & b. What consolidation entry would be required for these bonds on December 31, 2016 and December 31, 2018? (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate answers to nearest whole number.)
a.The consolidation entry should be prepared by debiting the bonds payable, interest income,
loss on retirement on bonds, and making a credit to investment in bonds and credit to interest expense.
Date |
Account title and explanation |
Debit($) |
Credit($) |
31 dec 2016 |
Bonds Payable |
181,200 |
|
Interest income |
13,860 |
||
Loss on retirement |
51,000 |
||
Investment in bonds |
228,060 |
||
Interest expense |
18,000 |
||
(To record the consolidation entry for bonds) |
Working notes:
Interest income=Price paid for bonds× Effective interest rate
=$231,000 × 6%
=$13,860
Interest expense=Book value of bond × interest rate on date of issue
=(900000÷5)×10%
=$18,000
Loss on repurchase of bond
Cost of acquisition $231,000
Book value ($900,000 × 1/5) = $ 180,000
Loss on repurchase/retirement $ 51,000
Investment balance, December 31, 2016
Original cost, 1/1/16 $231,000
Amortization of premium:
Cash interest
($210,000 × 8%) $16,800
Effective interest income(above) $13,860 $ 2,940
Investment, 12/31/16 $228,060
Bonds payable balance, December 31, 2016
Book value, 1/1/16 (above) $180,000
Amortization of discount:
Cash interest ($210,000 × 8%) $16,800
Effective interest expense (above)$18,000 $1200
Bonds payable, 12/31/16 $181,200
b. | Date | Account title and explanation | Debit($) | Credit($) | |||||
31-Dec-18 | Bonds Payable | $ 183,972 | |||||||
Interest income | 13,497 | ||||||||
investment in Zack(Balancing figure) | 42,424 | ||||||||
Investment in bonds | $221,641 | ||||||||
Interest expense | 18,252 | ||||||||
Working notes: | |||||||||
For 2017 | |||||||||
Interest income: | |||||||||
Interest income=Investment balance of bonds for the year× Effective interest rate | |||||||||
=$228,060 × 6% (rounded) | |||||||||
=$13,684 | |||||||||
Interest expense=liability balance for the year × interest rate on date of issue | |||||||||
=181200×10% | |||||||||
=$18,120 | |||||||||
Investment balance, December 31, 2017 | |||||||||
Original cost, 1/1/17 $231,000 | $228,060 | ||||||||
Amortization of premium: | |||||||||
Cash interest | |||||||||
($210,000 × 8%) $16,800 | |||||||||
Effective interest income(above) $13,684 $ 2,940 | $ 3,116 | ||||||||
Investment, 12/31/17 $228,060 | $224,944 | ||||||||
Bonds payable balance, December 31, 2017 | |||||||||
Book value, 1/1/17 (above) $180,000 | $ 181,200 | ||||||||
Amortization of discount: | |||||||||
Cash interest ($210,000 × 8%) $16,800 | |||||||||
Effective interest expense (above)$18,120 $1200 | 1320 | ||||||||
Bonds payable, 12/31/17 $181,200 | $ 182,520 | ||||||||
For 2018 | |||||||||
Interest income: | |||||||||
Interest income=Investment balance of bonds for the year× Effective interest rate | |||||||||
=$224,944 × 6% (rounded) | |||||||||
= | $13,497 | ||||||||
Interest expense=liability balance for the year × interest rate on date of issue | |||||||||
=182520×10% | |||||||||
=$18,252 | |||||||||
Investment balance, December 31, 2018 | |||||||||
Original cost, 1/1/18 $231,000 | $224,944 | ||||||||
Amortization of premium: | |||||||||
Cash interest | |||||||||
($210,000 × 8%) $16,800 | |||||||||
Effective interest income(above) $13,497 $ 2,940 | $ 3,303 | ||||||||
Investment, 12/31/18 $228,060 | $221,641 | ||||||||
Bonds payable balance, December 31, 2018 | |||||||||
Book value, 1/1/18 (above) $180,000 | $ 182,520 | ||||||||
Amortization of discount: | |||||||||
Cash interest ($210,000 × 8%) $16,800 | |||||||||
Effective interest expense (above)$18,252 $1200 | 1452 | ||||||||
Bonds payable, 12/31/18 $181,200 | $ 183,972 | ||||||||