Question

Cairns owns 75 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 $2,000,000 in 10-year bonds to the public at 110. The bonds had a cash interest rate of 8 percent payable every December 31. Cairns acquired 40 percent of these bonds at 92 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. December 31, 2017

3. December 31, 2018

Answer 1

Bonds Payable (2000000 *40%) 800,000 The parent acquired these bonds at 92% of Face Value on 1/1/2016 Purchase Price (800000*92%) 736,000 Annual amortization 800000 -736000 8 Years (10-2) 64000 Annual amortization 8000 Calculating the effect on the Premium of the Bonds Payable Premium (64000-8000) 56000 The Premium on the Bond Payable is $56000 Interest Rate is 8% Cash (800000*8%) 64,000

Cash Payment amortization Intra Entity expense Interest expense 64,000 Cash Collection -8000 56,000 Intra Entity Income Interest Income 64,000 8000 72,000 Investment (736000 +8000) 744,000 Book Value as on 1/1/2014 2000000*110% 2,200,000 Premium on 1/1/2014 2200000 - 2000000 200,000 Calculation of Premium amortization Premium amortization 200,000 *2 10 Premium amortization 40,000

Value of Bonds Less Amortization of Premium Value of Bonds Share of Investment in % Controlling interest in Bonds Payable Less Purchase Price Investment in Hamilton 2,200,000 (40,000) 2,160,000 40% 864,000 (736,000) 128,000 Credit Debit 800,000 56,000 72,000 Date Account title & explanation 66 12/31/2016 Bonds Payable Premium on Bonds Payable Interest Income Investment in Bonds Interest expense Investment in Hamilton (To eliminate intra-entity bonds and related interest) 744,000 56,000 128,000 800,000 48,000 72,000 12/31/2017 Bonds Payable Premium on Bonds Payable (56000-8000) Interest Income Investment in Bonds Interest expense Investment in Hamilton (To eliminate intra-entity bonds and 752,000 56,000 112,000 (128000 +56000-72000)

related interest ) 83 84 12 85 800,000 40,000 72,000 12/31/2018 Bonds Payable Premium on Bonds Payable (48000-8000) Interest Income Investment in Bonds Interest expense Investment in Hamilton (To eliminate intra-entity bonds and related interest) 760,000 56,000 96,000 (112000+56000-72000)