Question

Wood Corporation owns 70 percent of Carter Company's voting shares. On January 1, 20X3, Carter sold bonds with a par value of $600,000 at 98. Wood purchased $400,000 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 Note: Assume using straight-line amortization of bond discount or Required: What amount of interest expense should be reported in the 20X4 consolidated income statement? b. Prepare the journal entries Wood recorded during 20X4 with regard to its investment in Carter bonds. (If no entry is required for a t the first account field.) t, select "No journal entry required" in Journal entry worksheet Record the interest received on the bonds Note: Enter debits before creds 20004 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.)

Answer 1

a	On the consolidated income statement only the amount of interest will be recorded as interest
	expense that is associated with the bonds sold to non affliates.
	Bonds with par value $200000 will be sold to non affiliates at 98.Discount on bonds payable to
	non affiliates will be $4000 and will be amortized over 5 years that is over the life of the bonds,
	Cash interest to non affiliates for 20X4
			$200000*8%
			$16,000
		Discount to be amortized	$4000/5
			$800
		Thus interest expense to be recorded on the consolidated income statement
			$16000+$800
			$16,800
b	The following journal entries will be recorded by W Corporation during 20X4 in relation to its
	investment in Company C bonds
	Date	Account Title	Dr Amount	Cr Amount
	20X4
	1-Jan	Cash ($400000*8%*1/2)	$16,000
		To Interest Receivable		$16,000
		to record receipt of interest accrued on dec 31 20X3
	1-Jun	Cash($400000*8%*1/2)	$16,000
		Investment in Company C Bonds ($400000*2%*1/10)	$800
		To Interest Income		$16,800
		to record receipt of semi annual interest and amortization of discount
	31-Dec	Cash($400000*8%*1/2)	$16,000
		Investment in Company C Bonds ($400000*2%*1/10)	$800
		To Interest Income		$16,800
		To Record the receipt of semi annual interest and amortization discount
	c	The following worksheet elimiating entries will be prepared by W Corporation to remove the effects of the intercorporate bond ownership
	Date	Account Title	Dr Amount	Cr Amount
	20X4
	31-Dec	Bonds Payable	$400,000
		Interest Income ($16800*2)	$33,600
		To Investment in Company C Bonds($392000+($800*4)]		$395,200
		To Bonds Discount [$8000-($800*4)]		$4,800
		To Interest Expense		$33,600
		to eliminate intercorporate indebtness
	31-Dec	Interest Payable	$16,000
		To Interest Receivable		$16,000
		to eliminate intercorporate int receivable and payable