Question

Cairns owns 80 percent of the voting stock of Hamilton, 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. Cairns uses the equity method in its internal records to account for its investment in Hamilton.

On January 1, 2014, Hamilton sold $1,000,000 in 10-year bonds to the public at 115. The bonds had a cash interest rate of 9 percent payable every December 31. Cairns acquired 45 percent of these bonds at 88 percent of face value on January 1, 2016. Both companies utilize the straight-line method of amortization.

Prepare the consolidation worksheet entries to recognize the effects of the intra-entity bonds at each of the following dates. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1. December 31, 2016

2. (for above date)Prepare Entry B to eliminate accounts stemming from intra-entity bonds and to recognize the gain on the effective retirement of this debt.

3. December 31, 2017

4. (for above date)Prepare Entry *B to remove the intra-entity bond accounts that remain on the individual records of both companies.

5. December 31, 2018

6. (for above date)Prepare Entry *B to remove the intra-entity bond accounts that remain on the individual records of both companies.

Answer 1

Date	Account Title and Explanation	Debit	Credit
December 31, 2016	Bond Payable	$       450,000
	Premium on Bond Payable	$         47,250
	Interest Income	$         47,250
	Investment in Bonds		$       402,750
	Interest Expense		$         33,750
	Gain on Retirement of Bonds		$       108,000
Bond Payable (1000000*45%)			$       450,000
Purchase Price (450000*88%)			$       396,000
Annual Amortization ((450000-396000)/(10-2))			$           6,750
Intra-entity Income (450000*9%+6750)			$         47,250
Intra-entity Expense (450000*9%-6750)			$         33,750
Investment in Bonds (450000*88%+6750)			$       402,750
Book Value (1/1/14) (10000*115)			$   1,150,000
Premium (1/1/14) (1150000-1000000)			$       150,000
Amortization Premium (150000/10*2 years)			$         30,000
Book Value Payable (1/1/16) (1150000-30000)			$   1,120,000
Acquisition %			45%
Controlling Interest in Bond Payable (1/1/16)			$       504,000
Gain on Retirement of Bonds (504000-396000)			$       108,000
Date	Account Title and Explanation	Debit	Credit
December 31, 2017	Bond Payable	$       450,000
	Premium on Bond Payable	$         40,500
	Interest Income	$         47,250
	Investment in Bonds		$       409,500
	Interest Expense		$         33,750
	Investment in H. Inc.		$         94,500
Premium on Bond Payable (47250-6750)			$         40,500
Investment in Bonds (402750+6750)			$       409,500
Investment in H. Inc. (108000+33750-47250)			$         94,500
Date	Account Title and Explanation	Debit	Credit
December 31, 2018	Bond Payable	$       450,000
	Premium on Bond Payable	$         33,750
	Interest Income	$         47,250
	Investment in Bonds		$       416,250
	Interest Expense		$         33,750
	Investment in H. Inc.		$         81,000
Premium on Bond Payable (40500-6750)			$         33,750
Investment in Bonds (409500+6750)			$       416,250
Investment in H. Inc. (94500+33750-47250)			$         81,000