Question

Cairns owns 70 percent of the voting stock of Hamilton, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition. Cairns uses the equity method in its internal records to account for its investment in Hamilton On January 1, 2014, Hamilton sold $1,000,000 in 10-year bonds to the public at 115. The bonds had a cash interest rate of 8 percent payable every December 31. Cairns acquired 45 percent of these bonds at 88 percent of face value on January 1, 2016. Both companies utilize the straight-line method of amortization. Prepare the consolidation worksheet entries to recognize the effects of the intra-entity bonds at each of the following dates. If no entry is required for a transaction/event, select "No journal entry required in the first account field.) a. December 31, 2016 b. December 31, 2017 c. December 31, 2018 view transaction list

Answer 1

Prepare the consolidated worksheet :-

Date	Consolidating entries	Debit (in$)	Credit (in$)
31 Dec.2016	Bonds payable	450000
	Premium on Bonds payable	47250
	Interest income	42750
	To investment in bonds (396000+6750)		402750
	To interest expenses		29250
	To Gain on retirement of bonds		108000
31 Dec.2017	Bonds payable	450000
	Premium on Bonds payable (47250-6750)	40500
	Interest income	42750
	To investment in bonds (402750+6750)		409500
	To interest expenses		29250
	To investment in Hamilton		94500
31 Dec 2018	Bonds payable	450000
	Premium on Bonds payable (40500-6750)	33750
	Interest income	42750
	To investment in bonds (409500+6750)		416250
	To interest expenses		29250
	To investment in Hamilton		81000

Working notes:-

Bonds payable	1000000*45%	450000
Purchase price on Bonds	450000*88%	396000
Annual amortization	(450000-396000)/8	6750
Premium on Bonds payable	(450000-396000)-6750	47250

Intra entity income
Cash collection	450000*8%	36000
Add:- Amortization		6750
Intra entity income		42750

Intra entity expenses
Cash collection	450000*8%	36000
Less:- Amortization		(6750)
Intra entity expenses		29250

Investment in bonds	396000+6750	402750
Book value @1-1-2016	1000000*1.15	1150000
Premium on Bonds payable	1150000-1000000	150000
Amortization of premium	(1150000/10)*2	30000
Book value@ 1-1-2018	1150000-30000	1120000
Controlling interest in bonds payable	1120000*45%	504000
Gain on retirement of bonds	504000-396000	108000