Choco owns 70% of Cake. On 1/1/2015, Cake issued $800,000 10 years bond at 6%. C
ID: 2529320 • Letter: C
Question
Choco owns 70% of Cake. On 1/1/2015, Cake issued $800,000 10 years bond at 6%. Cake issued the bond at $724,000, with effective interest of 7%. On 1/1/2016, Choco purchased all of Cake’s bond for $886,000 with effective interest at 5% and Cake’s bond has been effectively retired.
What is the book value of Cake’s bond as of 12/31/2015?
Cash interest
Effective interest
Amortization of bond discount
Calculate the amount of gain or loss from this transaction to be recognized in consolidated statements on 12/31/2015.
Make a journal entry that Cake will record regarding the bond interest expense on 12/31/2016.
Make a journal entry that Choco will record regarding the 1/1/2016 investment on bond, and bond interest expense on 12/31/2016.
Cash interest
Effective interest
Amortization of bond discount
Explanation / Answer
1. Calculation of book value of cakes bond
The bond discount of $76,000 must be amortized to Interest Expense over the life of the bond. We assume that interest payment is made twice a year so interest payment made is $24000 (800000*6/100*6/12)
The effective interest rate is the market interest rate on the date that the bonds were issued. In our case the market interest rate on January 1, 2015 was 3.5% per semiannual period for 20 semiannual periods.
Loss of $2726.9 will be recorded in the books.
Period Cash Interest Effective Interest Amortisation Bond Carrying Value 1/1/2015 (800000-76000) 724000 1/6/2015 24000 25340 1340 725340 31/12/2015 24000 25386.9 1386.9 726726.9Related Questions
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