Cairns owns 80 percent of the voting stock of Hamilton, Inc. The parent’s intere
ID: 2554927 • Letter: C
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 $1,000,000 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.)
a,December 31, 2016
b, December 31, 2017
c, December 31, 2018
view transaction list transaction list No Date Accounts Debit Credit December 31, Bonds payable 2016 Interest income Premium on bonds payable Gain on retirement of bonds Interest expense Investment in bonds December 31 2017 , Bonds payable 2 Interest income Premium on bonds payable Investment in Hamilton Interest expense Investment in bonds December 31 2018 Bonds payable Interest income remium on bonds payable Investment in Hamilton Interest expenseExplanation / Answer
Bonds payable 100000*4
Bonds payable 100000*4
400000 Purchase price of the bonds (400000*92%) 368000 Annual amortization = (400000-368000)/(10-2) 4000 Premium on bonds payable = $32000-4000 28000 Cash amount =$400000*8% 32000 Intra entity expense = 32000-4000 28000 Intra entity income = $32000+4000 36000 The investment in bonds is computed below: Investment in bonds = $368000+4000 372000 Book value as on Jan 2011 = 1000000*110% 1100000 Premium on bonds=1100000-1000000 100000 Amortization of premium = (100000/10)*2 20000 Controlling interest in bonds payable =(1100000-20000)*40% 432000 Gain on retirement of bonds = $432000-368000 64000 Date Accounts and explanation Debit Credit 31-Dec-16 Bonds payable $400,000 Interest income 36000 Premium on bonds payable 28000 Gain on retirement of bond $64,000 Interest expense $28,000 Investment in bonds $372,000 Investment in bonds = $372000+4000 376000 Investment in Hamilton=$64000+28000-36000 56000 Premium on bonds payable =28000-4000 24000 Date Accounts and explanation Debit Credit 31-Dec-17 Bonds payable $400,000 Interest income 36000 Premium on bonds payable $24,000 Investment in Hamilton 56,000 Interest expense $28,000 Investment in bonds $376,000 Investment in bonds = $376000+4000 380000 Investment in Hamilton=$56000+28000-36000 48000 Premium on bonds payable = 24000-4000 20000 Date Accounts and explanation Debit Credit 31-Dec-18 Bonds payable $400,000 Interest income 36000 Premium on bonds payable $20,000 Investment in Hamilton 48000 Interest expense $28,000 Investment in bonds $380,000