Concept explainers
a.
Find the amount of gain or loss from the retirement of this debt should be reported on the consolidated income statement for 2017.
a.
Explanation of Solution
Computation of the amount of gain or loss from the retirement of this debt should be reported on the consolidated income statement for 2017:
Particulars | Amount |
Acquisition price of bonds | $ 283,550 |
Carrying amount of bonds payable | |
$ (221,749) | |
Loss on retirement | $ 61,801 |
Table: (1)
Working note:
Computation of amount of bonds payable:
Effective | |||||
Carrying | Interest | Cash | Year‑end | ||
Date | Amount | (12% Rate) | Interest | Amortization | Carrying Amount |
2015 | $435,763 | $52,292 | $50,000 | $2,292 | $438,055 |
2016 | $438,055 | $52,567 | $50,000 | $2,567 | $440,622 |
2017 | $440,622 | $52,875 | $50,000 | $2,875 | $443,497 |
Table: (2)
b.
Find the balances which should appear in the Investment in Company B’s account on Company O’s records and the Bonds Payable account of as of December 31, 2018.
b.
Explanation of Solution
Computation of Investment in Bonds as on December 31, 2018 | |
Particulars | Amount |
Cost of acquisition | $ 283,550 |
Amortization of premium: | |
Cash interest | $ 25,000 |
Interest income | $ 22,684 |
Investment in Bonds as on December 31, 2018 | $ 281,234 |
Table: (3)
Computation of Bonds payable as on December 31, 2018 | |
Carrying amount of Bonds | $ 443,497 |
Amortization of discount: | |
Cash interest | $ 50,000 |
Interest expense | $ 53,220 |
Bonds payable as on December 31, 2018 | $ 446,717 |
Table: (4)
The entry to record the intra-entity bonds:
Entry *B | ||||
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
Bond payable | 223,359 | |||
| 61,801 | |||
Interest Income | 22,684 | |||
Investment in Bonds | 26,610 | |||
Interest expense | 281,234 | |||
(being the intra-entity bonds recognized) |
Table: (5)
c.
Identify the consolidation entry which would be required on December 31, 2018, because of these bonds.
c.
Explanation of Solution
The consolidation entry which would be required on December 31, 2018, because of these bonds:
Entry *B | ||||
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
Bond payable | 229,561 | |||
Retained Earnings as on 01/01/18 | 56,909 | |||
Interest Income | 20,806 | |||
Investment in Bonds | 27,920 | |||
Interest expense | 279,356 | |||
(being the intra-entity bonds recognized) |
Table: (6)
Working note:
Computation of loss on retirement:
Particulars | Amount |
Original issue price as on 1/1/15 | $ 435,763 |
Discount amortization (2015–2017) | $ 17,519 |
Carrying amount 12/31/17 | $ 453,282 |
Intra-entity portion of bonds payable (50%) | $ 226,641 |
Purchase price | $ 283,550 |
Loss on retirement | $ 56,909 |
Table: (7)
Computation of carrying amount of investment in bonds:
Particulars | Amount |
Purchase price as on 12/31/17 | $ 283,550 |
Premium amortization (2018) | $ (4,194) |
Carrying amount as on 12/31/18 | $ 279,356 |
Table: (8)
Computation of carrying amount of investment in bonds:
Particulars | Amount |
Original issue price as on1/1/15 | $ 435,763 |
Discount amortization (2015–2018) | $ 23,359 |
Carrying amount 12/31/18 | $ 459,122 |
Company O's ownership | 50% |
Intra-entity portion as on 12/31/18 | $ 229,561 |
Table: (9)
Computation of amount of interest income:
Particulars | Amount |
Cash interest | $ 25,000 |
Premium amortization | $ (4,194) |
Intra-entity interest income as on 2018 | $ 20,806 |
Table: (10)
Computation of amount of interest expense:
Particulars | Amount |
Cash interest | $ 25,000 |
Discount amortization | $ 2,920 |
Intra-entity interest expense as on 2018 | $ 27,920 |
Table: (11)
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