Paulina, Incorporated, owns 90 percent of Southport Company. On January 1, 2021, Paulina acquires half of Southport’s $560,000 outstanding 13-year bonds. These bonds had been sold on the open market on January 1, 2018, 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, 2030. Southport issued this debt originally for $488,056. Paulina paid $317,576 for this investment, indicating an 8 percent effective yield Assuming that both parties use the straight-line method, what consolidation entry would be required on December 31, 2021, because of these bonds? Assume that the parent is not applying the equity method.
Paulina, Incorporated, owns 90 percent of Southport Company. On January 1, 2021, Paulina acquires half of Southport’s $560,000 outstanding 13-year bonds. These bonds had been sold on the open market on January 1, 2018, 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, 2030. Southport issued this debt originally for $488,056. Paulina paid $317,576 for this investment, indicating an 8 percent effective yield Assuming that both parties use the straight-line method, what consolidation entry would be required on December 31, 2021, because of these bonds? Assume that the parent is not applying the equity method.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter11: Determining The Cost Of Capital
Section: Chapter Questions
Problem 1P: 11-1 After-Tax Cost of Debt
Calculate the after-tax cost of debt under each of the following...
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Paulina, Incorporated, owns 90 percent of Southport Company. On January 1, 2021, Paulina acquires half of Southport’s $560,000 outstanding 13-year bonds. These bonds had been sold on the open market on January 1, 2018, 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, 2030. Southport issued this debt originally for $488,056. Paulina paid $317,576 for this investment, indicating an 8 percent effective yield
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Assuming that both parties use the straight-line method, what consolidation entry would be required on December 31, 2021, because of these bonds? Assume that the parent is not applying the equity method.
Transcribed Image Text:No
1
Transaction
1
Accounts
Bonds payable
Interest income
Retained earnings
Investment in Southport Bonds
Interest expense
Debit
257,109 X
63,737 X
1,993 X
Credit
291,569 X
31,270
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