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.)

19200 is not the correct answer

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%)

Bonds payable 480,000

Interest income? (its not 40320)

Investment in Carter Company bonds (its not 474240)

Bond discount (it's not 5760)

Interest expense (it's not 40320)

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

a) In the consolidated financial statements, interest amount would be recorded as paid to the non affiliates. Since on Jan 1 20X3, the bonds worth $480000 are purchased by Wood Corporation at 98 thus,

Bonds subscribed by Non Affiliates= $720000-$480000

                                                   = $240000

Interest rate given in the question is assumed to be 8% p.a. compounded annually.

Since the interest is given semi-annually thus we have to find out the nominal rate of interest by the following formulae:

Effective Rate= (1+Nominal Rate/m)m -1

0.08= (1+ NR/2)2 -1

1.08= (1+NR/2)2

NR= 7.846% or 7.85% approx.

Thus, Interest to be recorded in Consolidated Financial Statements:

($240000*7.85/2*100)*2

=$18840

b) Journal Entry in Wood Corporations:

Investment in Bonds A/c Dr.   470400

          To Bank A/c                470400

Bank A/c Dr.                         9420

           To Interest A/c           9420

Bank A/c Dr.                         9420

           To Interest A/c           9420

Bank A/c Dr.                         9420

           To Interest A/c            9420

Bank A/c Dr.                          9420

           To Interest A/c             9420

Interest A/c Dr.                       18840

           To Income Statement   18840

c) Journal Entry required to remove the effect of inter corporate bond:

Interest Income A/c Dr                    18840

     To Interest Expenses A/c           18840

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