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Online Enterprises owns 95 percent of Downlink Corporation. On January 1, 20X1,

ID: 2328548 • Letter: O

Question

Online Enterprises owns 95 percent of Downlink Corporation. On January 1, 20X1, Downlink issued $210,000 of five-year bonds at 115. Annual interest of 12 percent is paid semiannually on January 1 and July 1. Online purchased $110,000 of the bonds on August 31, 20X3, at par value. The following balances are taken from the separate 20X3 financial statements of the two companies:

Note: Assume using straight-line amortization of bond discount or premium.

Compute the amount of interest expense that should be reported in the consolidated income statement for 20X3. (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)

Compute the gain or loss on constructive bond retirement that should be reported in the 20X3 consolidated income statement. (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)

c. Prepare the consolidation worksheet consolidation entry or entries as of December 31, 20X3, to remove the effects of the intercorporate bond ownership. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Round your final answer to nearest whole dollar.)

-Record the entry to eliminate the effects of the intercompany ownership in bonds for 20X3.

-Record the entry to eliminate the intercompany interest receivables/payables for 20X3.

Online Enterprises owns 95 percent of Downlink Corporation. On January 1, 20X1, Downlink issued $210,000 of five-year bonds at 115. Annual interest of 12 percent is paid semiannually on January 1 and July 1. Online purchased $110,000 of the bonds on August 31, 20X3, at par value. The following balances are taken from the separate 20X3 financial statements of the two companies:

Note: Assume using straight-line amortization of bond discount or premium.

Online Enterprises Downlink Corporation   Investment in Downlink Corporation Bonds $ 115,700   Interest Income 4,550   Interest Receivable 6,600   Bonds Payable $ 210,000   Bond Premium 14,100   Interest Expense 18,900   Interest Payable 13,200 Required: a.

Compute the amount of interest expense that should be reported in the consolidated income statement for 20X3. (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)

b.

Compute the gain or loss on constructive bond retirement that should be reported in the 20X3 consolidated income statement. (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)

c. Prepare the consolidation worksheet consolidation entry or entries as of December 31, 20X3, to remove the effects of the intercorporate bond ownership. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Round your final answer to nearest whole dollar.)

-Record the entry to eliminate the effects of the intercompany ownership in bonds for 20X3.

-Record the entry to eliminate the intercompany interest receivables/payables for 20X3.

Explanation / Answer

SOLUTION

A.

B.

C.

Particulars Amount ($) Par value of bonds outstanding 210,000 Annual interest rate 12% Interest Payment 25,200 Amortization of bond premium ($210,000 * 0.15) / 5 years (6,300) Interest charge for full year 18,900 Less: Interest on Bond Purchased by Online Enterprises ($18,900 * 1/2) * (4 months/12 months) (3,150) Interest expense included in consolidated income statement 15,750