Question

Fargus Corporation owned 55% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price. On January 1, 2017, Sanatee sold $1,400,000 in ten-year bonds to the public at 109. The bonds pay a 10% interest rate every December 31. Fargus acquired 50% of these bonds on January 1, 2019, for 95% of the face value. Both companies utilized the straight-line method of amortization. 1. What balances would need to be considered in order to prepare the consolidation entry in connection with these intra-entity bonds at December 31, 2019, the end of the first year of the intra-entity investment? Prepare schedules to show numerical answers for balances that would be needed for the entry. 2. How much is the gain from intra-entity bond transfer on 1/1/2019? 3. What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2019? 4. What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2020? 5. Assume that during the year of 2019, Sanatee has income of 400,000 and Fargus has income of 900,000 (with investment income included), how much is the equity income in Sanatee ?

Answer 1

Part 1

Balances of bonds payable, bond investment, interest income and interest expense are to be considered

Book value of bonds payable, January 1, 2017

Book value January 1, 2017 (1400000*1.09) original issue	1526000
Amortization 2017 and 2018 (126000 premium / 10 years)*2 years	(25200)
Book value of bonds payable on January 1, 2019	1500800
Book value of 50% of bonds payable (intra-entity portion) January 1, 2019	750400

Gain on retirement of bonds, January 1, 2019

Purchase price (1400000*50%*0.95) of investment		(665000)
Book value of liability		750400
Gain on retirement of bonds		$85400

Book value of bonds payable December 1, 2019

Book value of bonds payable on January 1, 2019	1500800
Amortization 2019	(12600)
Book value of bonds payable on December 31, 2019	1488200
Cash payment (1400000*50%*10%)	70000
Amortization of Premium for 2019 (140000*50%*0.09)/10	(6300)
Intra-entity expense	$63700
Book value of 50% of bonds payable (intra-entity portion) December 31, 2019 ((1488200*50%)-6300)	737800

Book value of investment December 31, 2019

Book value of investment January 1, 2019 (purchase price)	665000
Amortization – 2019 (700000-665000)/8	4375
Book value of bonds payable, December 31, 2019	669375
Cash receipt	70000
Amortization of discount for 2012	4375
Intra-entity interest revenue	74375

Part 2

Gain on retirement of bonds = $85400

Part 3

General journal	debit	credit
Bonds payable	700000
Premium on bonds payable	44100
Interest income	74375
Investment in bonds (665000+4375)		669375
Interest expense		63700
Gain on retirement		85400

Part 4

General journal	debit	credit
Bonds payable	700000
Premium on bonds payable (44100-6300)	37800
Interest income	74375
Investment in bonds (669375+4375)		673750
Interest expense		63700
Retained earnings (1/1/2020)		77725

Part 5

Consolidated net income = 400000+90000+74375-63700=$500675