In: Accounting
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 $110,000 of the bonds on August 31, 20X3, at par value. The following balances are taken from the separate 20X3 financial statements of the two companies: |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note: Assume using straight-line amortization of bond discount or premium.
|
SOLUTION
A.
Particulars | Amount ($) |
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 |