Opus, Incorporated, owns 80 percent of Bloom Company. On December 31, 2017, Opus

Question

Opus, Incorporated, owns 80 percent of Bloom Company. On December 31, 2017, Opus acquires half of Bloom's $650,000 outstanding bonds. These bonds had been sold on the open market on January 1, 2015, 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, 2027. Bloom issued this debt originally for $566,494. Opus paid $362,353 for this investment, indicating an 8 percent effective yield.

a.Assuming that both parties use the effective rate method, what gain or loss from the retirement of this debt should be reported on the consolidated income statement for 2017?

b.Assuming that both parties use the effective rate method, what balances should appear in the Investment in Bloom Bonds account on Opus’s records and the Bonds Payable account of Bloom as of December 31, 2018?

c.Assuming that both parties use the straight-line method, what consolidation entry would be required on December 31, 2018, because of these bonds? Assume that the parent is not applying the equity method.

Assuming that both parties use the effective rate method, what gain or loss from the retirement of this debt should be reported on the consolidated income statement for 2017? (Round your intermediate calculations to the nearest dollar amount.)

Assuming that both parties use the effective rate method, what balances should appear in the Investment in Bloom Bonds account on Opus’s records and the Bonds Payable account of Bloom as of December 31, 2018? (Round your intermediate calculations to the nearest dollar amount.)

Assuming that both parties use the straight-line method, what consolidation entry would be required on December 31, 2018, because of these bonds? Assume that the parent is not applying the equity method. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate calculations to the nearest dollar amount.

Explanation / Answer

The following table illustrates how discount is amortized under effective interest rate method. Year Cash Interest ( Bond Par Value * Coupon Rate ) Interest Expenses (Bond Issue Price * Market Interest Rate) Amortisation (Interest Expense - Cash Interest) Carrying Balance Unamortized Discount                      5,66,494                         83,506 2015                         65,000                         67,979                           2,979                      5,69,473                         80,527 2016                         65,000                         68,337                           3,337                      5,72,810                         77,190 2017                         65,000                         68,737                           3,737                      5,76,547                         73,453 2018                         65,000                         69,186                           4,186                      5,80,733                         69,267 2019                         65,000                         69,688                           4,688                      5,85,421                         64,579 2020                         65,000                         70,251                           5,251                      5,90,671                         59,329 2021                         65,000                         70,881                           5,881                      5,96,552                         53,448 2022                         65,000                         71,586                           6,586                      6,03,138                         46,862 2023                         65,000                         72,377                           7,377                      6,10,515                         39,485 2024                         65,000                         73,262                           8,262                      6,18,777                         31,223 2025                         65,000                         74,253                           9,253                      6,28,030                         21,970 2026                         65,000                         75,364                         10,364                      6,38,393                         11,607 2027                         65,000                         76,607                         11,607                      6,50,001                                  -1 a. Since the parent Company has bought 80% of the bond value, the same is to be retired in the consolidated balance sheet. As such 50% of the Value of the Bond as at 31 Dec 2017 is 50% X 650,000 = 325,000 The unamortized Discount as at 31 Dec 2017 is 50% X 36,727 The Actual cash paid is $362,353. Loss to be reported in the consolidated balance sheet is calculated as ($36,727 + $362,353) - $325,000 = $74,080 b. In the records of Opus, investment in bloom bonds should appear at $362,353. As far as Opus is considered individually, the discounts or the amortisation schedule does not matter. Their actual actual investment in these bonds is what is to appear. In the records of Bloom individually, Bonds payable will appear at $650,000. Discount on bonds will appear at 69,267 as at 31 Dec 2018. In case of the Consolidated Balance Sheet, Bonds Payable will appear at $320,000 which is the bonds remaining to be purchased by Opus The following table illustrates how discount is amortized under straight line method Year Cash Interest ( Bond Par Value * Coupon Rate ) Amortisation (Original Unamortized Discount/No. of Periods) Carrying Balance Unamortized Discount                      5,66,494                         83,506 2015                         65,000                           6,424                      5,72,918                         77,082 2016                         65,000                           6,424                      5,79,341                         70,659 2017                         65,000                           6,424                      5,85,765                         64,235 2018                         65,000                           6,424                      5,92,188                         57,812 2019                         65,000                           6,424                      5,98,612                         51,388 2020                         65,000                           6,424                      6,05,035                         44,965 2021                         65,000                           6,424                      6,11,459                         38,541 2022                         65,000                           6,424                      6,17,882                         32,118 2023                         65,000                           6,424                      6,24,306                         25,694 2024                         65,000                           6,424                      6,30,729                         19,271 2025                         65,000                           6,424                      6,37,153                         12,847 2026                         65,000                           6,424                      6,43,576                           6,424 2027                         65,000                           6,424                      6,50,000                                  -0 Since 50% of the Bonds are owned by Opus. The following Consolidation entry would be required in 31 Dec 2018 Bonds Payable Dr                      3,25,000 Loss on Retirement of Bonds                         95,165 Unamortized Discount Cr                         57,812 Investement in bonds of Opus Cr                      3,62,353 The above entry would effectively cancel 50% of the bonds of Bloom and the investment in bonds by Opus against each other.

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