Question

Opus, Incorporated, owns 90 percent of Bloom Company. On December 31, 2017, Opus acquires half of Bloom's $500,000 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, 2025. Bloom issued this debt originally for $435,763. Opus paid $283,550 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?

Answer 1

Opus owns 90% of Bloom. On December 31, 2017, Opus decides to purchase 50% of the bonds outstanding of Bloom. For this the Opus pays $283,550 (includes 8% effective interest that is to be paid. The company issued these bonds in January 2015 at 12% effective interest for $435,763 and it matures by the end of 2025. The cash yield on this bond is 10%

A. Gain or loss from the retirement of this debt should be reported on the consolidated income statement for 2017

Year-end Book Value of Bonds Payable for each year is computed below-

Date	Book Value	Effective Interest (12%)	Cash Interest	Amortization	Year-end Book Value =(Book value + Amortization)
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

Loss on Retirement is calculated below-

Loss on Retirement
Particulars	Amount (in $)
Acquisition Price of Bonds (given in question)	283,550
Less: Book Value of Bonds Payable (443,497 x 50%)	221,749
= Loss on Retirement	61,801

Loss on Retirement is $61,801.

B. Balances that should appear in the Investment in Bloom Bonds account on Opus's records and the Bonds Payable account of Bloom

Investment in Bloom's Bonds account
Particulars	Amount (in $)	Amount (in $)
Purchase Price (12/31/2017)		283,550
Cash Interest ($250,000 x 10%)	25,000
Less: Effective Interest Income ($283,550 x 8%)	22,684
= Amortization (22684-25000)		(2,316)
= Balance of B's Bonds as on 12/13/2018		281,234

Bonds Payable account
Particulars	Amount (in $)	Amount (in $)
Book Value (12/31/2017)		443,497
Cash Interest ($500,000 x 10%)	50,000
Less: Effective Interest Income ($283,550 x 8%)	53,220
= Amortization		3,220
= Balance of B's Bonds as on 12/13/2018		446,717

Balance of Investment in B's Bonds and Bonds Payable are $281,234 and $446,717.