Several years ago Brant, Inc., sold $1,050,000 in bonds to the public. Annual ca

ID: 2414565 • Letter: S

Question

Several years ago Brant, Inc., sold $1,050,000 in bonds to the public. Annual cash interest of 8 percent ($84,000) was to be paid on this debt. The bonds were issued at a discount to yield 10 percent. At the beginning of 2016, Zack Corporation (a wholly owned subsidiary of Brant) purchased $210,000 of these bonds on the open market for $231,000, a price based on an effective interest rate of 6 percent. The bond liability had a carrying amount on that date of $900,000. 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, 2016 and December 31, 2018? (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate answers to nearest whole number.)

Explanation / Answer

a.The consolidation entry should be prepared by debiting the bonds payable, interest income,

loss on retirement on bonds, and making a credit to investment in bonds and credit to interest expense.

Date

Account title and explanation

Debit($)

Credit($)

31 dec 2016

Bonds Payable

181,200

Interest income

13,860

Loss on retirement

51,000

Investment in bonds

228,060

Interest expense

18,000

(To record the consolidation entry for bonds)

Working notes:

Interest income=Price paid for bonds× Effective interest rate

=$231,000 × 6%

=$13,860

Interest expense=Book value of bond × interest rate on date of issue

=(900000÷5)×10%

=$18,000

Loss on repurchase of bond

Cost of acquisition $231,000

Book value ($900,000 × 1/5) = $ 180,000

Loss on repurchase/retirement $ 51,000

Investment balance, December 31, 2016

Original cost, 1/1/16 $231,000

Amortization of premium:

Cash interest

($210,000 × 8%) $16,800

Effective interest income(above) $13,860 $ 2,940

Investment, 12/31/16 $228,060

Bonds payable balance, December 31, 2016

Book value, 1/1/16 (above) $180,000

Amortization of discount:

Cash interest ($210,000 × 8%) $16,800

Effective interest expense (above)$18,000 $1200

Bonds payable, 12/31/16 $181,200