Question

In: Accounting

Several years ago Brant, Inc., sold $1,050,000 in bonds to the public. Annual cash interest of...

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.)

Solutions

Expert Solution

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

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