On january 1, 2018, H. acquired $20,000 (face value) of S.'s bonds in the open market. These bonds had an 8% cash interest rate. On the date of repurchase, the liability was shown within S.'s records at $21, 386. H.'s acquisition price was $18,732. Assume bonds have 4-years to maturity for amortization purposes. Both companies utilize straight line method of amortization.
What are the consolidation entry at the end of 2018 (Entry B)?
Answer:
Date | General journal | Debit | Credit |
December 31, 2018 | Bond payable | $ 20,000.00 | |
Premium on bond payable | $ 1,039.50 | ||
Interest income | $ 1,917.00 | ||
Investment in Bond | $ 19,049.00 | ||
Interest expense | $ 1,253.50 | ||
Investment in Fred | $ 2,654.00 | ||
(To record elimination entry for consolidation purpose.) |
Bond Issued | 21,386 |
Less: Face Value of Bond | 20,000 |
Premium on bond payable | 1,386 |
Divided: Number of Year for Bond Life | 4 |
Amortization per year | $ 346.50 |
Premium on bond payable after one year (1386-346.50) | $ 1,039.50 |
Acquisition cost of bond investment | |
Face value of Investment | 20,000 |
Acquisition cost of bond investment | 18,732 |
Discount on Investment in Bond (20000-18732) | 1,268 |
Amortization of Discount per year (1268/4 year remaining) | $ 317.00 |
Discount on Investment in Bond at end of first year (1268-317) | $ 951.00 |
Investment in Bond (20000-951) | $ 19,049.00 |
Gain (loss) On retirement | |
Carrying value of liability (As per above) | $ 21,386.00 |
Less: Acquisition cost of bond investment (20000*35%*96%) | $ 18,732.00 |
Gain (loss) On retirement | $ 2,654.00 |
Investment in Fred reduced every year (2654/4 year remaining) | $ 663.50 |
Inter-entity Interest balance | |
Interest income | |
Interest received in cash (20000*8%) | $ 1,600.00 |
Add : Amortization of Discount | $ 317.00 |
Inter entity Interest income | $ 1,917.00 |
Interest expense | |
Interest Paid in cash (20000*8%) | $ 1,600.00 |
Less: Amortization of Premium (346.5*35%) | $ 346.50 |
Inter entity interest expense | $ 1,253.50 |
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