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Smart Company issued $120,000 of 10 percent bonds on January 1, 20X1, at 120. The bonds...

Smart Company issued $120,000 of 10 percent bonds on January 1, 20X1, at 120. The bonds mature in 10 years and pay 10 percent interest annually on December 31. Phone Corporation holds 80 percent of Smart’s voting shares, acquired on January 1, 20X1, at underlying book value. On January 1, 20X4, Phone purchased Smart bonds with a par value of $49,500 from the original purchaser for $54,450. Phone uses the modified equity method in accounting for its ownership in Smart. Partial balance sheet data for the two companies on December 31, 20X5, are as follows:

Phone
Corporation		 Smart
Company
Investment in Smart Company Stock $ 144,000
Investment in Smart Company Bonds 53,298
Interest Income 4,352
Bonds Payable $ 120,000
Bond Premium 14,047
Interest Expense 9,726
Common Stock 300,000 100,000
Retained Earnings, December 31, 20X5 500,000 50,000


Required:
a. Compute the gain or loss on bond retirement reported in the 20X4 consolidated income statement.
b. Prepare the consolidation entry needed to remove the effects of the intercorporate bond ownership in completing the consolidation worksheet for 20X5.
c. What balance should be reported as consolidated retained earnings on December 31, 20X5?

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Answer #1

a) As the bond was issued at 20% premium we will take the selling price of bond = 49500(1.2)

The gain on bond retirement = 49500(1.2) - 54450= $4950

b) bonds payable Dr. 49500

Bond premium. Dr. 3798

To investment in bomds. Cr 53298

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