Odom, Inc., owns 60% of Brook Company. Several years ago, Brook Company issued b

Question

Odom, Inc., owns 60% of Brook Company. Several years ago, Brook Company issued bonds with face value of $1,200,000 to the public. Annual cash interest of 8% (face interest rate) was to be paid on these bonds. The bonds were issued at a discount to yield an effective interest of 10%. At the beginning of 2015, Odom purchased $240,000 (20%) of these bonds on the open market for $291,972, a price based on an effective interest rate of 6%. The bond liability of $1,200,000 (face value) has a book value of 1,003,167 on that date. Both companies used effective interest method to amortize discount or premium on the bonds. Odom Inc. uses the initial value method to account for its investment in Brook Company. Required (28 points): a. Prepare amortization tables for the bonds payable by Brook Company and for the bonds investment by Odom, Inc. for 2015 and 2016. b. Prepare consolidation entry for the bonds acquired by Odom on Dec 31, 2015 and Dec 31, 2016.

Explanation / Answer

ODOM INC OWNS 60% OF BROOK COMPANY

BROOK COMPANY:

FACEVALUE OF BONDS ISSUED=$12,00,000

CASH INTEREST=$12,00,000*8%=$96,000

EFFECTIVE INTEREST=10%

$2,40,000 BONDS PURCHASED BY ODOM INC FOR=$2,91,972

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