Question

Cairns owns 70 percent of the voting stock of Hamilton, Inc. The parent’s interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition. Cairns uses the equity method in its internal records to account for its investment in Hamilton.

On January 1, 2014, Hamilton sold $2,300,000 in 10-year bonds to the public at 110. The bonds had a cash interest rate of 9 percent payable every December 31. Cairns acquired 35 percent of these bonds at 92 percent of face value on January 1, 2016. Both companies utilize the straight-line method of amortization.

Prepare the consolidation worksheet entries to recognize the effects of the intra-entity bonds at each of the following dates. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1. December 31, 2016

2. December 31, 2017

3. December 31, 2018

Answer 1

Date	Account tiltes	debit	credit
31-12-16	Bonds Payable	805000
	Premium on Bonds Payable	56,350
	Interest expense	80,500
	Investment in bonds		748,650
	Interest expense		64,400
	Gain on retirement of bonds		128,800
31-12-17	Bonds Payable	805000
	Premium on Bonds Payable	48,300
	Interest Income	80,500
	Investment in bonds		756,700
	Interest expense		64,400
	Investment in Hamilton		112,700
31-12-18	Bonds Payable	805000
	Premium on Bonds Payable	40,250
	Interest Income	80,500
	Investment in bonds		764,750
	Interest expense		64,400
	Investment in Hamilton		96,600

Working:

a)
	Carrying value, January 1, 2014	2,530,000
	Amortization—2014–2015 ($23,000 per year	46,000
	[$230,000 premium ÷ 10 years] for two years)
	Carrying value of bonds payable, January 1, 2016	2,484,000
	Carrying value of 35% of bonds payable	869,400
	(intra-entity portion), January 1, 2016
	Purchase price ($2,300,000*35%* 92%)	740,600
	Carrying value of liability (computed above)	869,400
	Gain on retirement of bonds	128,800
	Carrying value, January 1, 2016 (computed above)	2,484,000
	Amortization for 2016	23,000
	Carrying value of bonds payable, December 31, 2016	2,461,000
	Carrying value of 40% of bonds payable (intra-entity portion),December 31, 2016	861,350
	Carrying value of investment, January 1, 2016 (purchase price)	740,600
	Amortization for 2016 ($66,400 discount ÷ 8 yr. rem. life)	8,050
	Carrying value of investment, December 31, 2016	748,650
	Interest expense:
	Cash payment ($2,300,000*35%* 9%)	72,450
	Amortization of premium for 2016 ($23,000 per year × 35% intra-entity portion)	8,050
	Intra-entity interest expense	64,400
	Interest income:
	Cash collection	72,450
	Amortization of discount for 2016 (above)	8,050
	Intra-entity interest income	80,500