Determining the Amount of Retirement Gain or Loss (Effective Interest Method)...

Determining the Amount of Retirement Gain or Loss (Effective

Interest Method)

Online Enterprises owns 95 percent of Downlink Corporation. On January 1, 20X1, Downlink issued $200,000 of five-year bonds at 115. Annual interest of 12 percent is paid semiannually on January 1 and July 1. Online purchased $100,000 of the bonds on July 1, 20X3, at par value. The following balances are taken from the separate 20X3 financial statements of the two companies:

Required

a. Compute the amount of interest expense that should be reported in the consolidated income statement for 20X3.

b. Compute the gain or loss on constructive bond retirement that should be reported in the 20X3 consolidated income statement.

c. Prepare the consolidation worksheet elimination entry or entries as of December 31, 20X3, to remove the effects of the intercorporate bond ownership.