Answer:
The Journal entries are as follows:
(1) On December 31, 2016
Bonds payable A/c Dr. $154,040
Interest income A/c Dr. $14,070
Loss on retirement of debt A/c Dr. $49,000
To investment in bonds $198,870
To Interest expense $18,240
(To record consolidation entry)
(2) On December 31, 2018
Bonds payable A/c Dr. $158,884
Interest income A/c Dr. $13,761
Investment in Zack A/c Dr. $40,266
To investment in bonds $194,152
To Interest expense $18,759
(To record consolidation entry)
Workings:
Interest expense for December 31, 2016:
Book value = 20% of Bond liability (as per equity method)
= 0.2 × $760,000
= $152,000
Interest expense = 12% of Book value
= 0.12 × $152,000
= $18,240
Interest expense for December 31, 2016:
= 12% of Book value
= 0.12 × $156,325
= $18,759
