Question

In 2000, The James Bond Company purchased all of the stock of the 007 Company at book value

James Bond accounts for this investment using the initial value method and 007 Company does not pay any dividends.
On 1/1/2015 The James Bond Company issued (sold) 400; 10% $1000 bonds for $440,000. These 20 year bonds pay interest
each July 1 and January 1.		James Bond Company uses straight line amortization for bond interest
On 1/1/2018 The 007 Company purchased all of these bonds in the open market for $417,000.
	007 Company uses straight line amortization for investment interest revenue
REQUIRED;
	A) Make the journal entry James Bond Company makes when it sells the bonds in 2015
	Cash	440,000
	To Bonds		400,000
	To Profit		40,000
	b) Make the journal entry James Bond makes on July 1 2015 with the first interest payment
	c) Make the journal entry 007 Company makes when it buys the bonds in 2018
	d) Make the journal entry 007 Company makes on July 1, 2018 when it receives its first interest payment
	e) Make the worksheet entry needed in 2018 connected with these bonds
	f) In 2018 James Bond reported unconsolidated income of $600,000 and 007 Company reported income of $80,000. What is consolidated income?
	g) Make the worksheet entry needed in 2019 connected with these bonds
	h) In 2019 James Bond reported unsolidated income of $600,000 and 007 Company reported income of $80,000. What is consolidated income?

Answer 1

1/1/2015	Cash account	440,000
	Premium on bonds payable		40,000
	Bonds Pyabale		400,000
	To record bond issuance at Premium - 400 bonds of $1,000 issued for $440,000)
7/1/2015	Interest expense	19,000
	Premium on bonds payable	1,000
	To Cash account		20000
	(To record half yearly interest paid )
	Interest to be paid = 400,000*10% *1/2 = 20,000
	Premium to be amortized = 40,000/20*1/2 = 1,000
	Interest expense = 20,000-1,000 = 19,000
	In the books of 007
1/1/2018	Investment in bonds	417000
	To Cash account		417000
7/1/2018	Cash account Dr	20000
	To Interest income		19500
	To Investment in bonds		500
	(To record receipt of interest on bonds @10% on $400,000 for the first half of the year)
	Premium paid on bonds	17000
	Number of years to be amortized over	17
	Amortization per year	1000
	Amortizatio at every interest payment =1,000/2	500

In 2018, the bonds were purchased by 007, they are listed as assets in 007 Balance sheet and as a liability on James company Balance sheet. During consolidation, both this asset as well as liability will have to be eliminated along with the premium on bonds, interest expense and interest income.

The balances in each of these will be as follows:

Bonds Payable = 400,000

Premium on bonds = 40,000 {less amount amortized over the last 4 years (2015, 2016, 2017 and 2018)} =

40,000 - 40,000/20*4= 40,000 - 8,000 = 32,000

Investment in bonds = 417,000 less amortization of premium paid for the year = 417,000 - 1,000 = 416,000

**$1,000 is arrived as follows:

Premium paid = 17,000

Number of years to maturity = 17

Amortiation per annum = 17,000 / 17 = 1,000

Interest expense in James company books = each instalment = 19,000, for the year 38,000

Interest income in 007 - each instalment = 19,500, for the year = 19,500*2 = 39,000

2018
Entry to elimiate Bond payable and bond receivable, Interest income and Interest expense
Bonds Payable	400000
Premium on bonds payable	32000
Investment in Bonds		416000
Interest Income	39000
To Interest Expense		38,000
Retained Earnings (balancing figure)		17000
	471000	471000

James company Unconsolidated income	600,000
+007 Income	80,000
+Interest expense	38,000
-Interest income	(39,000)
Consolidated income	679,000

2019:

Entry to elimiate Bond payable and bond receivable, Interest income and Interest expense
Bonds Payable	400000
Premium on bonds payable	30000
Investment in Bonds		415000
Interest Income	39000
To Interest Expense		38,000
Retained Earnings (balancing figure)		16000
	469000	469000

Note: Premium on bonds is yet again reduced by $2,000 owing to the amortization entries at each payment in James' books. Similarly Investment is reduced by $1,000 owing to the amortization entries in 007 books

James company Unconsolidated income	600,000
+007 Income	80,000
+Interest expense	38,000
-Interest income	(39,000)
Consolidated income	679,000