Question

Several years ago Brant, Inc., sold $1,000,000 in bonds to the public. Annual cash interest of 8 percent ($80,000) was to be paid on this debt. The bonds were issued at a discount to yield 10 percent. At the beginning of 2016, Zack Corporation (a wholly owned subsidiary of Brant) purchased $200,000 of these bonds on the open market for $221,000, a price based on an effective interest rate of 6 percent. The bond liability had a carrying amount on that date of $860,000. Assume Brant uses the equity method to account internally for its investment in Zack.

What consolidation entry would be required for these bonds on December 31, 2016 and December 31, 2018? (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate answers to nearest whole number.)

1. Prepare Entry B to eliminate the intra-entity debt holdings and to recognize the loss on retirement.

2. Prepare Entry *B to eliminate the intra-entity bond holdings and to adjust the investment in Zack for the unrecognized loss on retirement.

Answer 1

Part A

Event	General journal	Debit	Credit
Entry B	Bonds Payable	173200
	Interest Income	13260
	Loss on Retirement of Debt	49000
	Investment in Bonds		218260
	Interest Expense		17200

Loss on repurchase of bond
Cost of acquisition	221000
Book value ($860,000 × 1/5)	172000
Loss on repurchase	$49000

Interest balances for 2016
Interest income:$221,000× 6%	13260
Interest expense:$172,000 × 10%	17200

Investment balance, December 31, 2016
Original cost, 1/1/16		221000
Amortization of premium:Cash interest ($200,000 × 8%)	16000
Effective interest income	13260	2740
Investment, 12/31/16		218260

Bonds payable balance, December 31, 2016
Book value, 1/1/16		172000
Amortization of discount: Cash interest ($200,000 × 8%)	16000
Effective interest expense	17200	1200
Bonds payable, 12/31/16		$173200

Part B

Event	General journal	Debit	Credit
Entry *B	Bonds Payable	175972
	Interest Income	12921
	Investment in Zack	57164
	Investment in Bonds		212277
	Interest Expense		17452

Interest balances for 2017
Interest income:$218260 × 6%	13096
Interest expense:$173200 × 10%	17320

Investment balance, December 31, 2017
Book value, January 1, 2017		218260
Amortization of premium: Cash interest ($200,000 × 8%)	16000
Effective interest income	13096	2904
Investment, 12/31/17		215356

Bonds payable balance, December 31, 2017
Book value, January 1, 2017		173200
Amortization of premium:Cash interest ($200,000 × 8%)	16000
Effective interest income (above)	17320	1320
Investment, 12/31/17		174520

Interest balances for 2018
Interest income:$215356 × 6%	12921
Interest expense:$174520 × 10%	17452

Investment balance, December 31, 2018
Book value, January 1, 2018		215356
Amortization of premium: Cash interest ($200,000 × 8%)	16000
Effective interest income	12921	3079
Investment, 12/31/18		212277

Bonds payable balance, December 31, 2018
Book value, January 1, 2018		174520
Amortization of premium:Cash interest ($200,000 × 8%)	16000
Effective interest income (above)	17452	1452
Investment, 12/31/17		175972

Adjustment needed to investment in Zack for bond retirement loss:

Loss on retirement of debt		49000
Balances currently in retained earnings:
Interest income:
2016	13260
2017	13096	(26356)
Interest expense:
2016	17200
2017	17320	34520
Adjustment needed to Investment in Zack		$57164