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30 July, 14:20

Several years ago Brant, Inc., sold $900,000 in bonds to the public. Annual cash interest of 9 percent ($81,000) was to be paid on this debt. The bonds were issued at a discount to yield 12 percent. At the beginning of 2016, Zack Corporation (a wholly owned subsidiary of Brant) purchased $180,000 of these bonds on the open market for $201,000, a price based on an effective interest rate of 7 percent. The bond liability had a carrying amount on that date of $760,000. Assume Brant uses the equity method to account internally for its investment in Zack.

1. What consolidation entry would be required for these bonds on December 31, 2016?

2. What consolidation entry would be required for these bonds on December 31, 2018?

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  1. 30 July, 15:41
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    The Journal entries are as follows:

    (1) On December 31, 2016

    Bonds payable A/c Dr. $154,040

    Interest income A/c Dr. $14,070

    Loss on retirement of debt A/c Dr. $49,000

    To investment in bonds $198,870

    To Interest expense $18,240

    (To record consolidation entry)

    (2) On December 31, 2018

    Bonds payable A/c Dr. $158,884

    Interest income A/c Dr. $13,761

    Investment in Zack A/c Dr. $40,266

    To investment in bonds $194,152

    To Interest expense $18,759

    (To record consolidation entry)

    Workings:

    Interest expense for December 31, 2016:

    Book value = 20% of Bond liability (as per equity method)

    = 0.2 * $760,000

    = $152,000

    Interest expense = 12% of Book value

    = 0.12 * $152,000

    = $18,240

    Interest expense for December 31, 2016:

    = 12% of Book value

    = 0.12 * $156,325

    = $18,759
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