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Wood Corporation owns 70 percent of Carter Company’s voting shares. On January 1, 20X3, Carter sold...

Wood Corporation owns 70 percent of Carter Company’s voting shares. On January 1, 20X3, Carter sold bonds with a par value of $645,000 at 98. Wood purchased $430,000 par value of the bonds; the remainder was sold to nonaffiliates. The bonds mature in five years and pay an annual interest rate of 8 percent. Interest is paid semiannually on January 1 and July 1.
Required:
a.

What amount of interest expense should be reported in the 20X4 consolidated income statement? (Do not round your intermediate calculations. Round your final answers to nearest whole dollar.)

July 1, 20X4 Debit Cash 17200 (is correct), Debit Investment in Carter Company Bonds (is not 860) and Credit Interest Income (is not 18060).

     

b.

Prepare the journal entries Wood recorded during 20X4 with regard to its investment in Carter bonds. (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%)

Solutions

Expert Solution

In the entry you provided, when cash is received in January, considering that the interest is received in advance, no income will be recognised and interest received in cash will be recorded as advance income. This advance interest will be charged to profit and loss account over the next 6 months (as it is 6 months interest) along with the discount element. Therefore, on day 1, though teh cash leg of the entry is correct, the other 2 legs are not correct as there will be no profit and loss impact before passage of time post purchase

ekkarill92 answered 1 year ago
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