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 $1,100,000 in 10-year bonds to the public at 110. The bonds had a cash interest rate of 8 percent payable every December 31. Cairns acquired 45 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

Answer:

Particulars	Amount	Working
Bonds payable	$495,000	($1,100,000*45%)
Purchase price of bonds	$455,400	($495,000*92%)
Annual amortization	$4,950	($495,000-$455,400)/8
Premium on bonds payable	$34,650	($39,600- $4,950)

Intra Entity Income
Particulars	Amount	Working
Cash collection	$39,600	($495,000*8%)
Add amortization	$4,950
Intra - Entity income	$44,550

Intra Entity Expense
Particulars	Amount	Amount
Cash collection	$39,600	($495,000*8%)
Add Amortization	($4,950)
Intra entity expense	$34,650

Particulars	Amount	Amount
Investment in bonds	$460,350	(455,400+$4,950)
Book value as on 1st January 2016	$1,210,000	(1,100,000*1.10)
Premium on bonds payable	$110,000	($1,210,000- $1,100,000)
Amortization of premium	$22,0000	(110,000/10)*2

Particulars	Amount	Working
Book value as on 1/1/2016	$1,210,000
Less premium amortization for 2016 &2017	$22,000
Book value as on 1/1/2018	$1,188,000
Acquisition percent	45%
Controlling interest in bonds payable as on 2018	$534,600	($1,188,000*45%)
Gain on retirement of bonds	$79,200	($534,600- $455,400)

Date	Accounts title and Explanation	Debit	Credit
31.12.2016	Bonds payable	$495,000
	Interest income	$44,550
	Premium on bonds payable	$34,650
	Gain on retirement of bonds		$39,600
	Interest expenses		$34,650
	Investment in bonds		$499,950
31.12.2017	Bonds payable	$495,000
	Interest income	$44,550
	Premium on bonds payable ($34650 - $4,950)	$29,700
	Investment in Hamilton ($39,600 + $34,650 - $44,550)		$29,700
	Interest expenses		$34,650
	Investment in bonds ($499,950 + $4,950)		$504,900
31.12.2018	Bonds payable	$495,000
	Interest income	$44,550
	Premium on bonds payable (29,700 - $4,950)	$24,750
	Investment in Hamilton ($29,700 + $34,650 - $44,550)		$19,800
	Interest expenses		$34,650
	Investment in bonds ($504,900 + $4,950)		$509,850