Several years ago Brant, Inc., sold $1,000,000 in bonds to the public. Annual ca

Question

Several years ago Brant, Inc., sold $1,000,000 in bonds to the public. Annual cash interest of 8 percent ($80,000) was to be paid on this debt. The bonds were issued at a discount to yield 10 percent. At the beginning of 2013, Zack Corporation (a wholly owned subsidiary of Brant) purchased $200,000 of these bonds on the open market for $221,000, a price based on an effective interest rate of 6 percent. The bond liability had a book value on that date of $860,000. Assume Brant uses the equity method to account internally for its investment in Zack a. & b. What consolidation entry would be required for these bonds on December 31, 2013 and December 31, 2015? (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Date Consolidating Entries Debit Credit (1) Prepare entry B December 31, 2013 (2) Prepare entry B December 31, 2015

Explanation / Answer

Event General Journal Debit Credit Entry B Dec-31-2013 Bond payable $       1,73,200 Interest Income $           13,260 Loss on Retirement of Debt $           49,000 Investment in Bonds $       2,18,260 Interest Expense $           17,200 Entry *B Dec-31-2015 Bond payable $       1,75,972 Interest Income $           12,921 Investment in Zack $           40,836 Investment in Bonds $       2,12,277 Interest Expense $           17,452 Working Notes a. 1 Loss on repurchase of Bond Cost of Acquisition $       2,21,000 Book Value $       1,72,000 ( $ 860000 X *20%) (*$ 200000/ $ 1000000 ) Loss on repurchase $           49,000 2 Interest balance for 2013 Interest Income ( $ 221000 X 6% ) $           13,260 Interest Expense ( $ 172000 X 10% ) $           17,200 3 Investment balance on Dec-31-2013 Original Cost 1/1/2013 $       2,21,000 Amortization Premium Cash Interest ( $ 200000 X 8 % ) $ 16000 Effective Interest Income $ 13260 $             2,740 Investment 12/31/13 $       2,18,260 4 Bonds Payable balance on Dec-31-2013 Book Value 1/1/2013 $       1,72,000 Amortization of discount Cash Interest ( $ 200000 X 8 % ) $ 16000 Effective InterestExpense $ 17200 $             1,200 Bond Payable 12/31/13 $       1,73,200 b. 1 Interest balance for 2014 Interest Income ( $ 218260 X 6% ) $           13,096 Interest Expense ( $ 173200 X 10% ) $           17,320 2 Investment balance on Dec-31-2014 Book Value 1/1/2014 Amortization Premium 218260 Cash Interest ( $ 200000 X 8 % ) $ 16000 Effective Interest Income $ 13096 $             2,904 Investment 12/31/14 $       2,15,356 3 Bonds Payable balance on Dec-31-2014 Book Value 1/1/2014 $       1,73,200 Amortization of discount Cash Interest ( $ 200000 X 8 % ) $ 16000 Effective InterestExpense $ 17320 $             1,320 Bond Payable 12/31/14 $       1,74,520 4 Interest balance for 2015 Interest Income ( $ 215356 X 6% ) $           12,921 Interest Expense ( $ 174520 X 10% ) $           17,452 5 Investment balance on Dec-31-2015 Book Value 1/1/2015 $       2,15,356 Amortization Premium Cash Interest ( $ 200000 X 8 % ) $ 16000 Effective Interest Income $ 12921 $             3,079 Investment 12/31/15 $       2,12,277 6 Bonds Payable balance on Dec-31-2015 Book Value 1/1/2015 $       1,74,520 Amortization of discount Cash Interest ( $ 200000 X 8 % ) $ 16000 Effective InterestExpense $ 17452 $             1,452 Bond Payable 12/31/15 $       1,75,972

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