Question

Opus, Incorporated, owns 90 percent of Bloom Company. On December 31, 2017, Opus acquires half of Bloom's $720,000 outstanding bonds. These bonds had been sold on the open market on January 1, 2015, at a 12 percent effective rate. The bonds pay a cash interest rate of 10 percent every December 31 and are scheduled to come due on December 31, 2027. Bloom issued this debt originally for $627,501. Opus paid $401,376 for this investment, indicating an 8 percent effective yield. a. Assuming that both parties use the effective rate method, what gain or loss from the retirement of this debt should be reported on the consolidated income statement for 2017? b. Assuming that both parties use the effective rate method, what balances should appear in the Investment in Bloom Bonds account on Opus's records and the Bonds Payable account of Bloom as of December 31, 2018? c. Assuming that both parties use the straight-line method, what consolidation entry would be required on December 31, 2018, because of these bonds? Assume that the parent is not applying the equity method.

Answer 1

Part A

Loss on retirement

$82057

Acquisition price of bonds	401376
Carrying amount of bonds payable ($638637 × 50%)	(319319)
Loss on retirement	$82057

carrying amount of bonds payable

Year	Carrying amount	Effective interest (12%)	Cash interest	Amortization	Year-end carrying amount
2015	627501	75300	72000	3300	630801
2016	630801	75696	72000	3696	634497
2017	634497	76140	72000	4140	638637

Part B

Investment in Bloom bonds, 12/31/18	$397486
Bonds payable, 12/31/18	$643273

Investment in Bloom bonds
Purchase price—12/31/17		401376
Cash interest ($360,000 × 10%)	36000
Effective interest income ($401376 × 8%)	32110
Amortization		3890
Investment in Bloom bonds, 12/31/18		$397486

Bonds payable
Carrying amount—12/31/17		638637
Cash interest ($720,000 × 10%)	72000
Effective interest expense ($638637 × 12%)	76636
Amortization		4636
Bonds payable, 12/31/18		$643273

Part C

Entry	General journal	Debit	Credit
1	Bonds payable	330569
	Retained earnings	75012
	Interest income	30828
	Investment in bloom bonds		396204
	Interest expense		40205

Original issue price—1/1/15	627501
Discount amortization (2015–2017) ([$(720000-627501) ÷ 11] × 3 years)	25227
Carrying amount 12/31/17	652728
Intra-entity portion of bonds payable (50%)	326364
Purchase price	401376
Loss on retirement	$75012

Investment in Bloom bonds
Purchase price-12/31/17	401376
Premium amortization (2018) ($(401376-360000)/8)	(5172)
Carrying amount 12/31/18	$396204

Interest income
Cash interest ($360,000 × 10%)	36000
Premium amortization	(5172)
Intra-entity interest income—2018	$30828

Bonds payable
Original issue price—1/1/15	627501
Discount amortization (2015–2018) ([$(720000-627501) ÷ 11] × 4 years)	33636
Carrying amount 12/31/18	661137
Opus ownership	50%
Intra-entity portion—12/31/18	330569

Interest expense
Cash interest ($360,000 × 10%)	36000
Discount amortization ($(720000-627501) ÷ 11] × 1/2 years)	4205
Intra-entity interest expense—2018	$40205