Chapter 6, Problem 28P

a.

To determine

Identify the consolidation entry which would be required for these bonds on December 31, 2013.

Explanation of Solution

The consolidation entry which would be required for these bonds on December 31, 2013:

Entry B
Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
12/31/2013	Bond payable		154,040
	Loss on retirement of Debt		49,000
	Interest Income		14,070
	Investment in Bonds			198,870
	Interest expense			18,240
	(being the intra-entity bonds and the loss on retirement recognized)

Table: (1)

Working note:

Computation of Loss on Repurchase of Bonds
Particulars	Amount
Cost of acquisition	$     201,000
Carrying amount of Bonds	$     152,000
Loss on repurchase	$       49,000
Computation of Investment in Bonds as on December 31, 2013
Particulars	Amount
Cost of acquisition	$     201,000
Amortization of premium:
Cash interest	$       16,200
Interest income	$       14,070
Investment in Bonds as on December 31, 2013	$     198,870
Computation of Bonds payable as on December 31, 2013
Carrying amount of Bonds	$     152,000
Amortization of discount:
Cash interest	$       16,200
Interest expense	$       18,240
Bonds payable as on December 31, 2013	$     154,040

Table: (2)

Computation of interest expense:

$\begin{array}{c}\text{Interest}\text{expense}=\$152,000\times 12\%\\ =\$18,240\end{array}$

Computation of interest income:

$\begin{array}{c}\text{Interest}\text{expense}=\$201,000\times 7\%\\ =\$14,070\end{array}$

b.

To determine

Identify the consolidation entry which would be required for these bonds on December 31, 2015.

Explanation of Solution

The consolidation entry which would be required for these bonds on December 31, 2015 is as follows:

Entry *B
Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
12/31/2015	Bond payable		158,884
	Investment in Company Z		40,266
	Interest Income		13,761
	Investment in Bonds			194,152
	Interest expense			18,759
	(being the intra-entity bonds and the loss on retirement recognized)

Table: (3)

Working note:

Computation of Interest Balances for 2014 followed by 2015:

Interest Balances for 2014 followed by 2015
Interest income: $198,870 $\left(\text{Investment in Bonds balance for the year}\right)\times 7\%$	$13,921
Interest expense: $154,040 $\left(\text{liability balance for the year}\right)\times 12\%$	$18,485

Table: (4)

Computation of Investment in Bonds Balance as on December 31, 2014:

Investment in Bonds Balance, December 31, 2014
Carrying amount, January 1, 2014	$     198,870
Amortization of premium:
Cash interest $\left(\$180,000\times 9\%\right)$	$       16,200
Effective interest income	$       13,921
Investment in Bonds balance as on December 31, 2014	$     196,591

Table: (5)

Computation of Bonds payable balance as on December 31, 2014:

Bonds Payable Balance as on December 31, 2014
Carrying amount, January 1, 2014	$     154,040
Amortization of discount:
Cash interest $\left(\$180,000\times 9\%\right)$	$       16,200
Effective interest expense	$       18,485
Bonds payable balance as on December 31, 2014	$     156,325

Table: (6)

Computation of Investment in Bonds balance as on December 31, 2015:

Investment in Bonds Balance, December 31, 2015
Carrying amount, January 1, 2015	$     196,591
Amortization of premium:
Cash interest $\left(\$180,000\times 9\%\right)$	$       16,200
Effective interest income	$       13,761
Investment in Bonds balance as on December 31, 2015	$     194,152

Table: (7)

Computation of Bonds payable balance as on December 31, 2015:

Bonds Payable Balance, December 31, 2015
Carrying amount, January 1, 2015	$     156,325
Amortization of discount:
Cash interest $\left(\$180,000\times 9\%\right)$	$       16,200
Effective interest expense	$       18,759
Bonds payable balance as on December 31, 2015	$     158,884

Table: (8)