Question

Opus, Incorporated, owns 80 percent of Bloom Company. On December 31, 2017, Opus acquires half of Bloom's $650,000 outstanding bonds. These bonds had been sold on the open market on January 1, 2015, at a 12 percent effective rate. The bonds pay a cash interest rate of 10 percent every December 31 and are scheduled to come due on December 31, 2027. Bloom issued this debt originally for $566,494. Opus paid $362,353 for this investment, indicating an 8 percent effective yield.

a.Assuming that both parties use the effective rate method, what gain or loss from the retirement of this debt should be reported on the consolidated income statement for 2017?

b.Assuming that both parties use the effective rate method, what balances should appear in the Investment in Bloom Bonds account on Opus’s records and the Bonds Payable account of Bloom as of December 31, 2018?

c.Assuming that both parties use the straight-line method, what consolidation entry would be required on December 31, 2018, because of these bonds? Assume that the parent is not applying the equity method.

Assuming that both parties use the effective rate method, what gain or loss from the retirement of this debt should be reported on the consolidated income statement for 2017? (Round your intermediate calculations to the nearest dollar amount.)

Assuming that both parties use the effective rate method, what balances should appear in the Investment in Bloom Bonds account on Opus’s records and the Bonds Payable account of Bloom as of December 31, 2018? (Round your intermediate calculations to the nearest dollar amount.)

	Investment in Bloom bonds, 12/31/18 Bonds payable, 12/31/18

Assuming that both parties use the straight-line method, what consolidation entry would be required on December 31, 2018, because of these bonds? Assume that the parent is not applying the equity method. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate calculations to the nearest dollar amount.

Answer 1

The following table illustrates how discount is amortized under effective interest rate method.
Year	Cash Interest ( Bond Par Value * Coupon Rate )	Interest Expenses (Bond Issue Price * Market Interest Rate)	Amortisation (Interest Expense - Cash Interest)	Carrying Balance	Unamortized Discount
				5,66,494	83,506
2015	65,000	67,979	2,979	5,69,473	80,527
2016	65,000	68,337	3,337	5,72,810	77,190
2017	65,000	68,737	3,737	5,76,547	73,453
2018	65,000	69,186	4,186	5,80,733	69,267
2019	65,000	69,688	4,688	5,85,421	64,579
2020	65,000	70,251	5,251	5,90,671	59,329
2021	65,000	70,881	5,881	5,96,552	53,448
2022	65,000	71,586	6,586	6,03,138	46,862
2023	65,000	72,377	7,377	6,10,515	39,485
2024	65,000	73,262	8,262	6,18,777	31,223
2025	65,000	74,253	9,253	6,28,030	21,970
2026	65,000	75,364	10,364	6,38,393	11,607
2027	65,000	76,607	11,607	6,50,001	-1
a. Since the parent Company has bought 80% of the bond value, the same is to be retired in the consolidated balance sheet. As such 50% of the Value of the Bond as at 31 Dec 2017 is 50% X 650,000 = 325,000 The unamortized Discount as at 31 Dec 2017 is 50% X 36,727 The Actual cash paid is $362,353. Loss to be reported in the consolidated balance sheet is calculated as ($36,727 + $362,353) - $325,000 = $74,080
b. In the records of Opus, investment in bloom bonds should appear at $362,353. As far as Opus is considered individually, the discounts or the amortisation schedule does not matter. Their actual actual investment in these bonds is what is to appear. In the records of Bloom individually, Bonds payable will appear at $650,000. Discount on bonds will appear at 69,267 as at 31 Dec 2018. In case of the Consolidated Balance Sheet, Bonds Payable will appear at $320,000 which is the bonds remaining to be purchased by Opus
The following table illustrates how discount is amortized under straight line method
Year	Cash Interest ( Bond Par Value * Coupon Rate )	Amortisation (Original Unamortized Discount/No. of Periods)	Carrying Balance	Unamortized Discount
			5,66,494	83,506
2015	65,000	6,424	5,72,918	77,082
2016	65,000	6,424	5,79,341	70,659
2017	65,000	6,424	5,85,765	64,235
2018	65,000	6,424	5,92,188	57,812
2019	65,000	6,424	5,98,612	51,388
2020	65,000	6,424	6,05,035	44,965
2021	65,000	6,424	6,11,459	38,541
2022	65,000	6,424	6,17,882	32,118
2023	65,000	6,424	6,24,306	25,694
2024	65,000	6,424	6,30,729	19,271
2025	65,000	6,424	6,37,153	12,847
2026	65,000	6,424	6,43,576	6,424
2027	65,000	6,424	6,50,000	-0
Since 50% of the Bonds are owned by Opus. The following Consolidation entry would be required in 31 Dec 2018
Bonds Payable Dr		3,25,000
Loss on Retirement of Bonds		95,165
	Unamortized Discount Cr		57,812
	Investement in bonds of Opus Cr		3,62,353
The above entry would effectively cancel 50% of the bonds of Bloom and the investment in bonds by Opus against each other.