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, 2027. Bloom issued this debt originally for $435,763. Opus paid $283,550 for this investment, indicating an 8 percent effective yield.

 

1. 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

Account Titles	Debit	Credit
Dec 31,2018
Bonds Payable	$      2,27,764
Interest Income	$         21,645
Retained Earnings, 1/1/18	$         58,257
Interest Expense		$         27,471
Investment in Bloom Bonds		$      2,80,195
Because Bloom uses the straight‑line method of amortization, the loss on retirement must be computed again.
Original issue price—January 1, 2015	$      4,35,763
* Discount amortization (Year 2015 - 2017) ([$64,237/13] x 3 years)	$         14,824
Book value 12/31/17	$      4,50,587
* Discount on Bonds Payable = $500,000 - $435,763 = 64,237
Intercompany portion of bonds payable (50%)  = 450586.92/2	$      2,25,293
Purchase price	$      2,83,550
Loss on retirement	$       (58,257)
Investment in Bloom Bonds
Purchase price—12/31/17	$      2,83,550
* Premium amortization (2018) ($33,550/10)	$         (3,355)
Book value 12/31/02	$      2,80,195
* Premium on Amortization = $283,550 - $500,000/2 = 33,550
Interest Income
Cash interest ($250,000 x 10%)	$         25,000
Premium amortization (above)	$         (3,355)
Book value—2018	$         21,645
Bonds Payable
Original issue price 1/1/15	$      4,35,763
* Discount amortization (Year 2015 - 2018) ([$64,237/13] x 4 years)	$         19,765
Book value 12/31/18	$      4,55,528
Opus ownership	$                  1
Intercompany portion—12/31/18	$      2,27,764
Interest Expense
Cash interest ($250,000 x 10%)	$         25,000
Discount amortization ([$64,237/13] x 1/2)	$           2,471
Book value—2018	$         27,471