In 2000, The James Bond Company purchased all of the stock of the 007 Company at
ID: 2546600 • Letter: I
Question
In 2000, The James Bond Company purchased all of the stock of the 007 Company at book value
James Bond accounts for this investment using the initial value method and 007 Company does not pay any dividends. On 1/1/2015 The James Bond Company issued (sold) 400; 10% $1000 bonds for $440,000. These 20 year bonds pay interest each July 1 and January 1. James Bond Company uses straight line amortization for bond interest On 1/1/2018 The 007 Company purchased all of these bonds in the open market for $417,000. 007 Company uses straight line amortization for investment interest revenue REQUIRED; A) Make the journal entry James Bond Company makes when it sells the bonds in 2015 Cash 440,000 To Bonds 400,000 To Profit 40,000 b) Make the journal entry James Bond makes on July 1 2015 with the first interest payment c) Make the journal entry 007 Company makes when it buys the bonds in 2018 d) Make the journal entry 007 Company makes on July 1, 2018 when it receives its first interest payment e) Make the worksheet entry needed in 2018 connected with these bonds f) In 2018 James Bond reported unconsolidated income of $600,000 and 007 Company reported income of $80,000. What is consolidated income? g) Make the worksheet entry needed in 2019 connected with these bonds h) In 2019 James Bond reported unsolidated income of $600,000 and 007 Company reported income of $80,000. What is consolidated income?Explanation / Answer
In 2018, the bonds were purchased by 007, they are listed as assets in 007 Balance sheet and as a liability on James company Balance sheet. During consolidation, both this asset as well as liability will have to be eliminated along with the premium on bonds, interest expense and interest income.
The balances in each of these will be as follows:
Bonds Payable = 400,000
Premium on bonds = 40,000 {less amount amortized over the last 4 years (2015, 2016, 2017 and 2018)} =
40,000 - 40,000/20*4= 40,000 - 8,000 = 32,000
Investment in bonds = 417,000 less amortization of premium paid for the year = 417,000 - 1,000 = 416,000
**$1,000 is arrived as follows:
Premium paid = 17,000
Number of years to maturity = 17
Amortiation per annum = 17,000 / 17 = 1,000
Interest expense in James company books = each instalment = 19,000, for the year 38,000
Interest income in 007 - each instalment = 19,500, for the year = 19,500*2 = 39,000
2019:
Note: Premium on bonds is yet again reduced by $2,000 owing to the amortization entries at each payment in James' books. Similarly Investment is reduced by $1,000 owing to the amortization entries in 007 books
1/1/2015 Cash account 440,000 Premium on bonds payable 40,000 Bonds Pyabale 400,000 To record bond issuance at Premium - 400 bonds of $1,000 issued for $440,000) 7/1/2015 Interest expense 19,000 Premium on bonds payable 1,000 To Cash account 20000 (To record half yearly interest paid ) Interest to be paid = 400,000*10% *1/2 = 20,000 Premium to be amortized = 40,000/20*1/2 = 1,000 Interest expense = 20,000-1,000 = 19,000 In the books of 007 1/1/2018 Investment in bonds 417000 To Cash account 417000 7/1/2018 Cash account Dr 20000 To Interest income 19500 To Investment in bonds 500 (To record receipt of interest on bonds @10% on $400,000 for the first half of the year) Premium paid on bonds 17000 Number of years to be amortized over 17 Amortization per year 1000 Amortizatio at every interest payment =1,000/2 500Related Questions
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