Advanced Accounting - Standalone book
Advanced Accounting - Standalone book
12th Edition
ISBN: 9780077862220
Author: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik
Publisher: McGraw-Hill Education
Question
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Chapter 6, Problem 28P

a.

To determine

Identify the consolidation entry which would be required for these bonds on December 31, 2013.

a.

Expert Solution
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Explanation of Solution

The consolidation entry which would be required for these bonds on December 31, 2013:

Entry B
DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
12/31/2013Bond payable  154,040
Loss on retirement of Debt    49,000
Interest Income    14,070
Investment in Bonds  198,870
Interest expense    18,240
(being the intra-entity bonds and the loss on retirement recognized)

Table: (1)

Working note:

Computation of Loss on Repurchase of Bonds
ParticularsAmount
Cost of acquisition $     201,000
Carrying amount of Bonds $     152,000
Loss on repurchase $       49,000
Computation of Investment in Bonds as on December 31, 2013
ParticularsAmount
Cost of acquisition $     201,000
Amortization of premium:
Cash interest $       16,200
Interest income $       14,070
Investment in Bonds as on December 31, 2013 $     198,870
Computation of Bonds payable as on December 31, 2013
Carrying amount of Bonds $     152,000
Amortization of discount:
Cash interest $       16,200
Interest expense $       18,240
Bonds payable as on December 31, 2013 $     154,040

Table: (2)

Computation of interest expense:

Interestexpense=$152,000×12%=$18,240

Computation of interest income:

Interestexpense=$201,000×7%=$14,070

b.

To determine

Identify the consolidation entry which would be required for these bonds on December 31, 2015.

b.

Expert Solution
Check Mark

Explanation of Solution

The consolidation entry which would be required for these bonds on December 31, 2015 is as follows:

Entry *B
DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
12/31/2015Bond payable  158,884
Investment in Company Z    40,266
Interest Income    13,761
Investment in Bonds  194,152
Interest expense    18,759
(being the intra-entity bonds and the loss on retirement recognized)

Table: (3)

Working note:

Computation of Interest Balances for 2014 followed by 2015:

Interest Balances for 2014 followed by 2015
Interest income: $198,870 (Investment in Bonds balance for the year)×7%$13,921
Interest expense: $154,040 (liability balance for the year) × 12%$18,485

Table: (4)

Computation of Investment in Bonds Balance as on December 31, 2014:

Investment in Bonds Balance, December 31, 2014
Carrying amount, January 1, 2014 $     198,870
Amortization of premium:
Cash interest ($180,000 × 9%) $       16,200
Effective interest income $       13,921
Investment in Bonds balance as on December 31, 2014 $     196,591

Table: (5)

Computation of Bonds payable balance as on December 31, 2014:

Bonds Payable Balance as on December 31, 2014
Carrying amount, January 1, 2014 $     154,040
Amortization of discount:
Cash interest ($180,000 × 9%) $       16,200
Effective interest expense $       18,485
Bonds payable balance as on December 31, 2014 $     156,325

Table: (6)

Computation of Investment in Bonds balance as on December 31, 2015:

Investment in Bonds Balance, December 31, 2015
Carrying amount, January 1, 2015 $     196,591
Amortization of premium:
Cash interest ($180,000 × 9%) $       16,200
Effective interest income $       13,761
Investment in Bonds balance as on December 31, 2015 $     194,152

Table: (7)

Computation of Bonds payable balance as on December 31, 2015:

Bonds Payable Balance, December 31, 2015
Carrying amount, January 1, 2015 $     156,325
Amortization of discount:
Cash interest ($180,000 × 9%) $       16,200
Effective interest expense $       18,759
Bonds payable balance as on December 31, 2015 $     158,884

Table: (8)

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