Question

Martin Company is an 80% Subsidiary of Aston Corp. On January 1, 20X1, MartinCompany issued 10-year term bonds with a par value of $100,000, and a coupon rate of 8%, to Middle Company (a nonaffiliate) at 110. Interest is paid semi-annually on June 30 and December 31. On January 2, 20X3, AstonCorporation purchased the bonds from Middle Company for 104. Both companies use the straight-line method to amortize any bond premium or discount. Prepare all of the eliminating and adjusting entries that would be made on the consolidation worksheet as of December 31, 20X3

Answer 1

Bond Premium with Straight-Line Amortization:

The Martin Company's journal entry to record the isssuance of the bond on January 1, 2011 will be:  

The Semiannual interest Paymetns $4,000 ($100,000 * 8% * 6/12)

Date	Particulars	Debit $	Credit $
Jan 1, 2011	Cash A/c	104,000
	Bonds Payable		100,000
	Premium on Bonds

On Jan 1, 2011 the book value of this bond is $104,000 ($100,000 credit balance in Bonds Payable + $4,000 credit balance in Premium on Bonds payable).

The martin company issued the bond for $100,000 @ 8% and maturing in 10 Years ,the Annual straight-line amortization of the bond premium will be $400 ($4,000 divided by 10 Years).

The amortization of the bond premium is often recorded at the time of its semiannual interest payments. The Journal entries on June 30 and December 31 will be:

Date	Particulars	Debit $	Credit $
June 30, 2019	Interest Expense A/c	3,800
	Premium on Bonds Payable A/c	200
	To Cash A/c		4,000
Dec 31, 2019	Interest Expenses	3,800
	Premium on Bonds Payable	200
	To Cash A/c		4,000

The combination of the interest payments and the bond amortization results in the net amount of $7,600. (4000 + 4000 = 8000 - 400 (200 +200) )

Interest Expense

Jun 30, 2011 Premium amount minus amortization 3,800
Dec 31, 2011 Premium amount minus azortization 3,800
Dec 31, 2011 balance 7,600

The folllowing T-account shows how the balance in the account Premium on Bonds Payable will decrease over the 10 - years life of the bonds under the straight line method of amortization.

Premium On Payable Bonds

Jun 30, 2011 amortization 200 Dec 31, 2011 amortization 200	4,000 Jan 1, 2011 bond issued
Jun 30, 2012 amortization 200 Dec 31, 2012 amortization 200	3,600 Dec 31, 2012 balance
Jun 30, 2013 amortization 200 Dec 31, 2013 amortization 200	3,200 Dec 31, 2013 balance
Jun 30, 2014 amortization 200 Dec 31, 2014 amortization 200	2,800 Dec 31, 2014 balance
Jun 30, 2015 amortization 200 Dec 31, 2015 amortization 200	2,400 Dec 31, 2015balance
Jun 30, 2016 amortization 200 Dec 31, 2016 amortization 200	2,000 Dec 31, 2016 balance
Jun 30, 2017 amortization 200 Dec 31, 2017 amortization 200	1,600 Dec 31, 2017 balance
Jun 30, 2018 amortization 200 Dec 31, 2018 amortization 200	1,200 Dec 31, 2018 balance
Jun 30, 2019 amortization 200 Dec 31, 2019 amortization 200	800 Dec 31, 2019 balance
Jun 30, 2020 amortization 200 Dec 31, 2020  amortization 200	400 Dec 31, 2020 balance
Jun 30, 2021 amortization 200 Dec 31, 2021  amortization 200	0 Dec 31, 2021 balance