Question

Purse Corporation owns 70 percent of Scarf Company’s voting shares. On January 1, 20X3, Scarf sold bonds with a par value of $675,000 at 98. Purse purchased $450,000 par value of the bonds; the remainder was sold to nonaffiliates. The bonds mature in five years and pay an annual interest rate of 8 percent. Interest is paid semiannually on January 1 and July 1.

Required:
a. What amount of interest expense should be reported in the 20X4 consolidated income statement? (Do not round your intermediate calculations. Round your final answer to nearest whole dollar.)

b. Prepare the journal entries Purse recorded during 20X4 with regard to its investment in Scarf bonds. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round your intermediate calculations. Round your final answers to nearest whole dollar.)

c. Prepare all worksheet consolidation entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements for 20X4. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round your intermediate calculations. Round your final answers to nearest whole dollar.)

No General Journal Credit Date January 1, 20X4 Debit 18,000 Cash Interest receivable 18,000 July 1, 20X4 18,000 Cash Investment in Scarf Company bonds Interest income 3 18,000 December 31, 20% Interest receivable Investment in Scarf Company bonds Interest income c. Prepare all worksheet consolidation entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements for 20X4. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round your intermediate calculations. Round your final answers to nearest whole dollar.) Answer is not complete. No Event Credit Debit 450,000 Accounts Bonds payable Interest income Investment in Scarf Company bonds Bond discount Interest expense 0000000 18,000 Interest payable Interest receivable 18,000

Answer 1

a. Interest expenses = value of bonds to non affiliates x interest rate + amortization of discount
= [($675000 - 450000) x 0.08] + [{($675000 - 450000) x 0.02} / 5 years]
= $18000 + $900

= $18,900

b.

Date	General Journal	Debit	Credit
Jan 1, 20X4	Cash (450000 x 8% for half year)	$36,000
	Interest Receivable		$36,000
July 1	Cash (450000 x 8% for half year)	$36,000
	Investment in bonds (450000 x 2% for ten periods)	$900
	Interest Revenue		$36,900
	(To record accrual of interest and amortized 1/10 of bond discount)
Dec 31	Cash (450000 x 8% for half year)	$36,000
	Investment in bonds (450000 x 2% for ten periods)	$900
	Interest Revenue		$36900
	(To record accrual of interest and amortized 1/10 of bond discount)