Wood Corporation owns 70 percent of Carter Company’s voting shares. On January 1

Question

Wood Corporation owns 70 percent of Carter Company’s voting shares. On January 1, 20X3, Carter sold bonds with a par value of $720,000 at 98. Wood purchased $480,000 par value of the bonds; the remainder was sold to nonaffiliates. The bonds mature in five years and pay an annual interest rate of 8 percent. Interest is paid semiannually on January 1 and July 1.

What amount of interest expense should be reported in the 20X4 consolidated income statement? (Do not round your intermediate calculations. Round your final answers to nearest whole dollar.)

Prepare the journal entries Wood recorded during 20X4 with regard to its investment in Carter bonds. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your market rate of interest to 3 decimals. For example, .0547523 should be rounded to 5.475%)

Prepare all worksheet consolidation entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements for 20X4. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your market rate of interest to 3 decimals. For example, .0547523 should be rounded to 5.475%)

Wood Corporation owns 70 percent of Carter Company’s voting shares. On January 1, 20X3, Carter sold bonds with a par value of $720,000 at 98. Wood purchased $480,000 par value of the bonds; the remainder was sold to nonaffiliates. The bonds mature in five years and pay an annual interest rate of 8 percent. Interest is paid semiannually on January 1 and July 1.

Explanation / Answer

Bond is a fixed income investment in which an investor loans money to an entity that borrows the funds for a defined period of time at a variable or fixed interest rate.

As per the above case, Following has been answered:

a.The amount of interest expense should be reported in the 20X4 consolidated income statement is to be caclculated as:

{($720,000 * 0.08) + ($144,00*/5)} * 1/3 = $19200

*1440 is calculated as 2% of $720,000 as bonds were sold at 2% discount.

b. Journal Entries

Jan 20X4

Cash.......Dr 19200*

To interest receivables 19200

July 1

Cash $19200

Investment in bond of carter $960*

To Interest Income $20160

*$960 = (480,000-$470400) / 5*2

Dec 31 20X4

Cash $19200

Investment in bond of carter $960

To Interest Income $20160

c. Eliminating Entries in dec 20X4 are:

1. Bonds Payable .......Dr $480,000

Interest Income.......Dr $40,320

To investment in bond of carter $474,240*

Bond Discount $5,760**

Interest Expenses $40,320

* $474,240 = $470400 + ($960*4)

**$5,760 = $9600- ($960*4)

*** $40,320 = $20160 * 2

2. Interest payable ........Dr $19200

To Interest Receivable $19200

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