Nettle Corporation sold $140,000 par value, 10-year first mortgage bonds to Timb

Question

Nettle Corporation sold $140,000 par value, 10-year first mortgage bonds to Timberline Corporation on January 1, 20X5. The bonds which bear a nominal interest rate of 10 percent, pay interest semiannually on January 1 and July 1. The entry to record interest income by Timberline Corporation on December 31, 20X7, was as follows Note: Assume using straight-line amortization of bond discount or premium General Journal Debit Credit Interest Income Investment in Nettle Corporation Bonds 6,650 350 Timberline Corporation owns 65 percent of the voting stock of Nettle Corporation, and consolidated statements are prepared on December 31, 20X7 Required What was the original purchase price of the bonds to Timberline Corporation? b. What is the balance in Timberline's bond investment account on December 31, 20X7? cPrepare the worksheet elimination entry or entries needed to remove the effects of the intercompany ownership of bonds in preparing consolidated financial statements for 20X7.(lf no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Explanation / Answer

a) The original purchase price of bond to timberline Corporation would be = $140,000+ $ (350*2*10) = $ 140,000+ $7000= $147,000.

Explanation:

$350 is multiplied by 2 since it is a semiannual bond and is again multiplied by 10, since it is a 10 years bond and the premium is amortised on a straight line basis.

The bond would had issued at premium, it is evidenced from the journal entry of interest receivable being passed by Timberline on 31st December, 2007.

Interest income of just $ 6650 is credited , while $350 is credited as investment in Nettle corporation bonds, to amortise the premium on bond for 10 years.

when the bonds were purchased from Nettle corporation , Timberline would had passed the belowJournal entry to record the purchases.

(Debit) Investment in Nettle corporation bonds $147,000

(Credit) Cash 147,000

b) Timerbline's Bond investment in Nettle's corporation will show a balance of ($147,000-$350*2*3)= $144,900 ( 3 years of bond premium would be amortised by end of December,2007)

c) Intercompany elimination entries needs to be passed for Timberline's Bond investment in Nettle's Corporation, Interest receivable/payable and also interest paid/received during the year.

Following Journal entries needs to be passed by Timberline for December, 2007.

(Debit) Bonds issued to Timberline corporation $144,900

(Credit) Investments in Nettle's corporation bond $144,900

(Debit) Interest Payable $7000

(Credit) Interest Receivable $7000

(Debit) Interest Income $13,300

(Credit) Interest expense $13,300

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