Question

Online Enterprises owns 95 percent of Downlink Corporation. On January 1, 20X1, Downlink issued $210,000 of five-year bonds at 115. Annual interest of 12 percent is paid semiannually on January 1 and July 1. Online purchased $110,000 of the bonds on August 31, 20X3, at par value. The following balances are taken from the separate 20X3 financial statements of the two companies:

Note: Assume using straight-line amortization of bond discount or premium. Online Enterprises Downlink Corporation   Investment in Downlink Corporation Bonds $ 115,700   Interest Income 4,550   Interest Receivable 6,600   Bonds Payable $ 210,000   Bond Premium 14,100   Interest Expense 18,900   Interest Payable 13,200 Required: a. Compute the amount of interest expense that should be reported in the consolidated income statement for 20X3. (Do not round intermediate calculations. Round your final answer to nearest whole dollar.) b. Compute the gain or loss on constructive bond retirement that should be reported in the 20X3 consolidated income statement. (Do not round intermediate calculations. Round your final answer to nearest whole dollar.) c. Prepare the consolidation worksheet consolidation entry or entries as of December 31, 20X3, to remove the effects of the intercorporate bond ownership. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Round your final answer to nearest whole dollar.) -Record the entry to eliminate the effects of the intercompany ownership in bonds for 20X3. -Record the entry to eliminate the intercompany interest receivables/payables for 20X3.

Answer 1

SOLUTION

A.

Particulars	Amount ($)
Par value of bonds outstanding	210,000
Annual interest rate	12%
Interest Payment	25,200
Amortization of bond premium ($210,000 * 0.15) / 5 years	(6,300)
Interest charge for full year	18,900
Less: Interest on Bond Purchased by Online Enterprises
($18,900 * 1/2) * (4 months/12 months)	(3,150)
Interest expense included in consolidated income statement	15,750

B.

Particulars	Amount ($)
Sale price of bonds, January 1	126,500
Amortization of premium ($16,500 / 5yrs) * 2 2/3 years)	(8,800)
Book value at time of purchase	117,700
Purchase price	(110,000)
Gain on bond retirement	7,700

C.

S.No.	Accounts titles and Explanation	Debit ($)	Credit ($)
1.	Bonds Payable	110,000
	Premium on Bonds Payables	6,300
	Interest Income	4,550
	Investment in Downlink Corporation		110,000
	Interest Expense		3,150
	Gain on Bond Retirement		7,700
2.	Interest Payable	6,300
	Interest Receivable		6,300