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Opus, Incorporated, owns 80 percent of Bloom Company. On December 31, 2017, Opus acquires half of...

Opus, Incorporated, owns 80 percent of Bloom Company. On December 31, 2017, Opus acquires half of Bloom's $600,000 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 $522,917. Opus paid $334,480 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.

Solutions

Expert Solution

a. Compute gain or loss from the retirement of debt as follows:

The amount invested in bonds $334,480
Bonds payable - Book value ($532,197 × 50%) $266,098
Loss on retirement $68,382

Notes: Amortization schedule

Year Cash Interest Effective Interest Amortization Year-End Book Value
2014 $522,917
2015 $60,000 $62,750 $2,750 $525,667
2016 $60,000 $63,080 $3,080 $528,747
2017 $60,000 $63,450 $3,450 $532,197
b Compute investment balance as follows:
In the books of purchaser company
The amount invested in bonds, December 31, 2017 $334,480
Cash received - Interest ($300,000 × 10%) $30,000
Effective interest income ($334,480 × 8%) $26,758
              Amortization of premium $3,242
Investment in bonds, December 31, 2018 $331,238
In the books of issuer company
Bonds payable - Book value, December 31, 2017 $532,197
Cash paid - Interest ($600,000 × 10%) $60,000
Effective interest expense ($532,197 × 12%) ($63,864)
             Amortization of discount $3,864
Bonds payable, December 31, 2018 $536,060
c Prepare the following journal entry
Account Title and Explanation Debit Credit
Bonds payable $273,318
Interest income $26,552
Retained earnings - loss on retirement $64,127
                   Interest expense $32,965
                   Investment in bonds $331,032
Notes:
Loss on retirement of bonds
Cost of investment $334,480
Issue price of bonds $522,917
Add: Discount Amortization (77,083÷ 13 × 3) $17,788
Book value $540,705
50% of book value (Intra-entity investment) $270,353
Loss on retirement $64,127
Investment in bonds
The amount invested in bonds, December 31, 2017 $334,480
Amortization of premium ($334,480 ?300,000 ÷ 10) ($3,448)
Investment in bonds, December 31, 2018 $331,032
Interest income
Cash received - Interest ($300,000 × 10%) $30,000
Amortization of premium ($334,480 ?300,000 ÷ 10) ($3,448)
Intra-entity interest income $26,552
Bonds payable
Issue price of bonds $522,917
Discount on amortization ($77,083 ÷ 13 × 4) $23,718
Book value $546,635
Intra-entity investment - 50% of book value $273,318
Interest expense
Cash pad - Interest ($300,000 × 10%) $30,000
Add: Discount amortization ($77,083 ÷ 13) × 50% $2,965
Intra-entity interest expense $32,965

ekkarill92 answered 1 year ago
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