Fundamentals of Advanced Accounting
Fundamentals of Advanced Accounting
7th Edition
ISBN: 9781259722639
Author: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik
Publisher: McGraw-Hill Education
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Chapter 6, Problem 31P

a.

To determine

Find the amount of gain or loss from the retirement of this debt should be reported on the consolidated income statement for 2017.

a.

Expert Solution
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Explanation of Solution

Computation of the amount of gain or loss from the retirement of this debt should be reported on the consolidated income statement for 2017:

ParticularsAmount
Acquisition price of bonds $     283,550
Carrying amount of bonds payable 
($443,497 × 50%) $    (221,749)
Loss on retirement $       61,801

Table: (1)

Working note:

Computation of amount of bonds payable:

  Effective   
 CarryingInterestCash Year‑end
DateAmount(12% Rate)InterestAmortizationCarrying Amount
2015$435,763$52,292$50,000$2,292$438,055
2016$438,055$52,567$50,000$2,567$440,622
2017$440,622$52,875$50,000$2,875$443,497

Table: (2)

b.

To determine

Find the balances which should appear in the Investment in Company B’s account on Company O’s records and the Bonds Payable account of as of December 31, 2018.

b.

Expert Solution
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Explanation of Solution

Computation of Investment in Bonds as on December 31, 2018
ParticularsAmount
Cost of acquisition $       283,550
Amortization of premium: 
Cash interest $         25,000
Interest income $         22,684
Investment in Bonds as on December 31, 2018 $       281,234

Table: (3)

Computation of Bonds payable as on December 31, 2018
Carrying amount of Bonds $       443,497
Amortization of discount: 
Cash interest $         50,000
Interest expense $         53,220
Bonds payable as on December 31, 2018 $       446,717

Table: (4)

The entry to record the intra-entity bonds:

Entry *B
 Date Accounts Title and Explanation Post Ref. Debit ($) Credit ($)
  Bond payable   223,359 
  Retained Earnings as on 01/01/18     61,801 
  Interest Income     22,684 
  Investment in Bonds      26,610
  Interest expense    281,234
  (being the intra-entity bonds recognized)   

Table: (5)

c.

To determine

Identify the consolidation entry which would be required on December 31, 2018, because of these bonds.

c.

Expert Solution
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Explanation of Solution

The consolidation entry which would be required on December 31, 2018, because of these bonds:

Entry *B
 Date Accounts Title and Explanation Post Ref. Debit ($) Credit ($)
  Bond payable   229,561 
  Retained Earnings as on 01/01/18     56,909 
  Interest Income     20,806 
  Investment in Bonds      27,920
  Interest expense    279,356
  (being the intra-entity bonds recognized)   

Table: (6)

Working note:

Computation of loss on retirement:

ParticularsAmount
Original issue price as on 1/1/15 $        435,763
Discount amortization (2015–2017) ([$64,237÷11]×3 years) $          17,519
Carrying amount 12/31/17 $        453,282
Intra-entity portion of bonds payable (50%) $        226,641
Purchase price $        283,550
Loss on retirement $          56,909

Table: (7)

Computation of carrying amount of investment in bonds:

ParticularsAmount
Purchase price as on 12/31/17 $        283,550
Premium amortization (2018) ($33,550÷8) $          (4,194)
Carrying amount as on 12/31/18 $        279,356

Table: (8)

Computation of carrying amount of investment in bonds:

ParticularsAmount
Original issue price as on1/1/15 $      435,763
Discount amortization (2015–2018) [($64,237÷11) × 4 years] $        23,359
Carrying amount 12/31/18 $      459,122
Company O's ownership50%
Intra-entity portion as on 12/31/18 $      229,561

Table: (9)

Computation of amount of interest income:

ParticularsAmount
Cash interest ($250,000 × 10%) $        25,000
Premium amortization $         (4,194)
Intra-entity interest income as on 2018 $        20,806

Table: (10)

Computation of amount of interest expense:

ParticularsAmount
Cash interest ($250,000 × 10%) $        25,000
Discount amortization ([$64,237÷11] ×12) $          2,920
Intra-entity interest expense as on 2018 $        27,920

Table: (11)

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