Question

Cairns owns 80 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 $1,000,000 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 40 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.) a. December 31, 2016 b. December 31, 2017 c. December 31, 2018

Answer 1

Answer:

Bonds payable = 1,000,000 x 40% = 400,000
Purchase price of the bonds = 400,000 x 92% = 368,000
Annual Organisation = (400000-368000)/(10-2) = 4000
Premium on bonds payable = 32000-4000 = 28000
Cash amount = 400000 x 8% = 32000
Intra entity expense = 32000 - 4000 = 28000
Intra entity Income = 32000+4000 = 36000
The Investment in bonds is computes below:
Investment in bonds = 368000+4000 = 372000
Book value as on Jan 14 = 1000000 x 110% = 1100000
Premium on bonds = 1100000 - 1000000 = 100000
Amortization of premium = (100000/10)x2 = 20000
Controlling Interest in bonds payable = (1100000-20000)x 40% = 432000
Gain on retirement of bonds = 432000-368000 = 64000

(a) Journal entry as on 31 Dec 2016

Date	Account title and explanation	Debit ($)	Credit ($)
31-12-16	Bonds payable	$400,000
	Interest Income	$36,000
	Premium on bonds payable	$28,000
	Gain on retirement of bond		$64,000
	Interest expense		$28,000
	Investment in bonds		$372,000

(b)
Investment in bonds = 372000+4000 = 376000
Investment in hanitton = 64000+28000-36000 = 56000
Premium on bonds payable = 28000-4000 = 24000

Date	Account title and explanation	Debit ($)	Credit ($)
31-12-17	Bonds payable	$400,000
	Interest Income	$36,000
	Premium on bonds payable	$24,000
	Gain on retirement of bond		$56,000
	Interest expense		$28,000
	Investment in bonds		$376,000

(c)
Investment in bonds = 376000+4000 = 380000
Investment in Hamitton = 56000+28000-36000 = 48000
Premium on bonds payable = 24000-4000 = 20000

Date	Account title and explanation	Debit ($)	Credit ($)
31-12-18	Bonds payable	$400,000
	Interest Income	$36,000
	Premium on bonds payable	$20,000
	Gain on retirement of bond		$48,000
	Interest expense		$28,000
	Investment in bonds		$380,000