Several years ago Abrams, Inc., sold $800,000 in bonds to the public. Annual cas

Question

Several years ago Abrams, Inc., sold $800,000 in bonds to the public. Annual cash interest of 8 percent ($64,000) was to be paid on this debt. The bonds were issued at a discount to yield 10 percent. At the beginning of 2012, Bierman Corporation (a wholly owned subsidiary of Abrams) purchased $100,000 of these bonds on the open market for $121,655, a price based on an effective interest rate of 6 percent. The bond liability had a book value on that date of $668,778. Assume Abrams uses the equity method to account internally for its investment in Bierman. What consolidation entry would be required for these bonds on

a.December 31,2012?

b.December 31,2014?

Explanation / Answer

a) 121655(1.06) = 128954.3

b) 121655(1.06)^3 = 144893.05

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