Chapter 6, Problem 31P

a.

To determine

Find the amount of gain or loss from the retirement of this debt should be reported on the consolidated income statement for 2017.

Explanation of Solution

Computation of the amount of gain or loss from the retirement of this debt should be reported on the consolidated income statement for 2017:

Particulars	Amount
Acquisition price of bonds	$     283,550
Carrying amount of bonds payable
$\left(\$443,497\times 50\%\right)$	$    (221,749)
Loss on retirement	$       61,801

Table: (1)

Working note:

Computation of amount of bonds payable:

		Effective
	Carrying	Interest	Cash		Year‑end
Date	Amount	(12% Rate)	Interest	Amortization	Carrying Amount
2015	$435,763	$52,292	$50,000	$2,292	$438,055
2016	$438,055	$52,567	$50,000	$2,567	$440,622
2017	$440,622	$52,875	$50,000	$2,875	$443,497

Table: (2)

b.

To determine

Find the balances which should appear in the Investment in Company B’s account on Company O’s records and the Bonds Payable account of as of December 31, 2018.

Explanation of Solution

Computation of Investment in Bonds as on December 31, 2018
Particulars	Amount
Cost of acquisition	$       283,550
Amortization of premium:
Cash interest	$         25,000
Interest income	$         22,684
Investment in Bonds as on December 31, 2018	$       281,234

Table: (3)

Computation of Bonds payable as on December 31, 2018
Carrying amount of Bonds	$       443,497
Amortization of discount:
Cash interest	$         50,000
Interest expense	$         53,220
Bonds payable as on December 31, 2018	$       446,717

Table: (4)

The entry to record the intra-entity bonds:

Entry *B
Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Bond payable		223,359
	Retained Earnings as on 01/01/18		61,801
	Interest Income		22,684
	Investment in Bonds			26,610
	Interest expense			281,234
	(being the intra-entity bonds recognized)

Table: (5)

c.

To determine

Identify the consolidation entry which would be required on December 31, 2018, because of these bonds.

Explanation of Solution

The consolidation entry which would be required on December 31, 2018, because of these bonds:

Entry *B
Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Bond payable		229,561
	Retained Earnings as on 01/01/18		56,909
	Interest Income		20,806
	Investment in Bonds			27,920
	Interest expense			279,356
	(being the intra-entity bonds recognized)

Table: (6)

Working note:

Computation of loss on retirement:

Particulars	Amount
Original issue price as on 1/1/15	$        435,763
Discount amortization (2015–2017) $\left(\left[\$64,237÷11\right]\times 3\text{ years}\right)$	$          17,519
Carrying amount 12/31/17	$        453,282
Intra-entity portion of bonds payable (50%)	$        226,641
Purchase price	$        283,550
Loss on retirement	$          56,909

Table: (7)

Computation of carrying amount of investment in bonds:

Particulars	Amount
Purchase price as on 12/31/17	$        283,550
Premium amortization (2018) $\left(\$33,550÷8\right)$	$          (4,194)
Carrying amount as on 12/31/18	$        279,356

Table: (8)

Computation of carrying amount of investment in bonds:

Particulars	Amount
Original issue price as on1/1/15	$      435,763
Discount amortization (2015–2018) $\left[\left(\$64,237÷11\right)\times 4\text{ years}\right]$	$        23,359
Carrying amount 12/31/18	$      459,122
Company O's ownership	50%
Intra-entity portion as on 12/31/18	$      229,561

Table: (9)

Computation of amount of interest income:

Particulars	Amount
Cash interest $\left(\$250,000\times 10\%\right)$	$        25,000
Premium amortization	$         (4,194)
Intra-entity interest income as on 2018	$        20,806

Table: (10)

Computation of amount of interest expense:

Particulars	Amount
Cash interest $\left(\$250,000\times 10\%\right)$	$        25,000
Discount amortization $\left(\left[\$64,237÷11\right]\times \frac{1}{2}\right)$	$          2,920
Intra-entity interest expense as on 2018	$        27,920

Table: (11)