Question

S Company issued $1,000,000 par value 10-year bonds at 102 on January 1, 20X5, which M Corporation purchased. The coupon rate on the bonds is 9 percent. Interest payments are made semiannually on July 1 and January 1. On Jan 1, 20X8, P Company purchased $500,000 par value of the bonds from M for $492,200. P owns 65 percent of S’s voting shares.

Required:

1. What amount of gain or loss will be reported in S's 20X8 income statement on the retirement of bonds?
2. Will a gain or loss be reported in the 20X8 consolidated financial statements for P for the constructive retirement of bonds? What amount will be reported?
3. How much will P's purchase of the bonds change consolidated net income for 20X8?
4. Prepare the worksheet consolidating entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X8.
5. Prepare the worksheet consolidating entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X9.

Answer 1

Book value of liability reported by S's:

Par value of bonds outstanding $500,000

Unamortized premium $10,000 - [($10,000/10 years) × 3.5 years] - $6,500

Book Value of debt - $506,500

Amount paid by Parent (492,200)

Gain on bond retirement - $14,300

Gain on bond retirement Adjustment for excess of interest incomeover interest expense: $14,300

Interest income - $23,100

Interest expense - 22,000 + (1,100)

Increase in consolidated net income - $13,200

Eliminate intercompany bond holdings:

Bonds Payable - 500,000

Premiumon Bonds Payable - 6,000

Interest Income - 23,100

Investment in S's Company Bonds- 492,800

Interest Expense - 22,000

Gain on Bond Retirement $6,000 = ($10,000/10 years) × 6 years

$23,100 = [$45,000 + ($7,800/6.5 years)]/2

$492,800 = $492,200 + [($7,800/6.5 years)/2]$22,000 = ($45,000 - $1,000)/2

= 14,300

20X81 -   

Gild

(OperatingIncome - 200,000

Dividends - 400,000)

Leeds

(NetIncome - 1,000,000

Dividends - 300,000)

Interest Payable - 22,500

Interest Receivable - 22,500

Eliminate inter company bondholdings:

Bonds Payable - 500,000

Premium on Bonds Payable - 5,000

Interest Income - 46,200

Investment in S's Company Bonds - 494,000

Interest Expense - 44,000

Investment in S's Company Stock - 8,580

NCI in NA of S's - 4,620

($5,000 = ($10,000/10 years) × 5 years

$46,200 = $45,000 + (7,800/6.5 years)

$494,000 = $492,800 + ($7,800/6.5 years)

$44,000 = $45,00 - ($10,000/10 years)

$8,580 = ($14,300 - $1,100) × 0.65

$4,620 = ($14,300 - $1,100) × 0.35)

Interest Payable - 22,500

Interest Receivable - 22,500