Question

Spott is a 75%-owned subsidiary of Penthal. On January 1, 2013, Spott issued $900,000 of $1,000 face amount 8% bonds at par. The bonds have interest payments on January 1 and July 1 of each year and mature on January 1, 2017. On January 2, 2014, Penthal purchased all 900 bonds on the open market for $1,020 per bond. Both companies use straight-line amortization. (please explain about the periods.

Required: With respect to the bonds, use General Journal format to:

1.   Record the 2014 journal entries from July 1 to December 31 on Spott's books.

2.   Record the 2014 journal entries from July 1 to December 31 on Penthal's books.

3.   Record the elimination entries for the consolidation working papers for the year ending December 31, 2014.

Answer 1

1. Journal Entries in the Books of Spott: interest payments for the year

Spott's Books of Account
Date	Account	Debit	Credit
July 1, 2014	Interest Expenses	36000
	To Cash		36000
Dec. 31, 2014	Interest Expenses	36000
	To Interest Payable		36000

2. Journal Entries in the Books of Penthals: Purchase of bonds and interest received along with amortization of discount on purchase of bonds.

Penthals Books of Account
Date	Account	Debit	Credit
Jan. 2, 2014	Investment in Bonds of Spott Company	918000
	To Cash		918000
July 1, 2014	Cash	36000
	To Investment in Bonds		3000
	To Interest Income		33000
Dec. 31, 2014	Interest Receivable	36000
	To Investment in Bonds		3000
	To Interest Revenue		33000

Note: As on the date of purchase of bonds, maturity period is 3 years so every year $6000 of total discount on purchase of bonds $18,000 will be amortized. (i.e 3000 half yearly)

3)

Consolidation Entry
Dec. 31, 2014	Bonds Payable	900000
	Interest Income (33000 +33000)	66000
	Loss on Retirement of Bond (Bal. Fighure)	24000
	To Investment in Bonds of Spott Company		918000
	To Interest Expenses (36000 +36000)		72000
Dec. 31, 2014	Interest Payable	36000
	To Interest Receivable		36000