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 $2,100,000 in 10-year bonds to the public at 105. The bonds had a cash interest rate of 9 percent payable every December 31. Cairns acquired 40 percent of these bonds at 96 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

Part A

Entry	date	General journal	Debit	Credit
Entry B	December 31, 2016	Bonds Payable (2100000*40%)	840000
		Premium on Bonds Payable (33600-4200)	29400
		Interest Income	79800
		Investment in bonds		810600
		Interest expense		71400
		Investment in Hamilton		67200

Part B

Entry	date	General journal	Debit	Credit
Entry *B	December 31, 2017	Bonds Payable	840000
		Premium on Bonds Payable (29400-4200)	25200
		Interest Income	79800
		Investment in bonds (810600+4200)		814800
		Interest expense		71400
		Investment in Hamilton (67200-		58800

Part C

Entry	date	General journal	Debit	Credit
Entry *B	December 31, 2018	Bonds Payable	840000
		Premium on Bonds Payable (25200-4200)	21000
		Interest Income	79800
		Investment in bonds (814800+4200)		819000
		Interest expense		71400
		Investment in Hamilton		50400

Carrying value of bonds payable, January 1, 2016

Carrying value, January 1, 2014 (2100000*1.05)	2205000
Amortization—2014–2015 ($5,000 per year[$105,000 premium ÷ 10 years] for two years)	21000
Carrying value of bonds payable, January 1, 2016	2184000
Carrying value of 40% of bonds payable(intra-entity portion), January 1, 2016	873600

Gain on retirement of bonds, January 1, 2016

Purchase price (2100000*40%*96%)	806400
Carrying value of liability (computed above)	873600
Gain on retirement of bonds	67200

Carrying value of bonds payable, December 31, 2016

Carrying value, January 1, 2016 (computed above)	2184000
Amortization for 2016	10500
Carrying value of bonds payable, December 31, 2016	2173500
Carrying value of 40% of bonds payable (intra-entity portion),December 31, 2016	869400

Carrying value of investment, December 31, 2016

Carrying value of investment, January 1, 2016 (purchase price)	806400
Amortization for 2016 ((2100000*40%*4%)÷ 8 yr. rem.life)	4200
Carrying value of investment, December 31, 2016	810600

Intra-entity interest balances for 2016

Interest expense:
Cash payment ((2100000*40%) × 9%)	75600
Amortization of premium for 2016 ($10500 per year × 40%intra-entity portion)	4200
Intra-entity interest expense	71400
Interest income:
Cash collection ((2100000*40%) × 9%)	75600
Amortization of discount for 2016 (above)	4200
Intra-entity interest income	79800