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, 2011, Hamilton sold $1,300,000 in 10-year bonds to the public at 105. The bonds had a cash interest rate of 8 percent payable every December 31. Cairns acquired 40 percent of these bonds at 96 percent of face value on January 1, 2013. 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.

Answer 1

Answer:

hello your question has a missing journal entry table attached below is the entry journal table completely filled

Explanation:

Amount of bonds acquired = 40% of original bond

i) Bonds payable = 40% * 1,300,000

                           = $520000

purchase price of bonds = $520000 * 96% ( FACE VALUE )

                                         = $499200

hence the annual amortization

(bonds payable - purchase price of bonds ) / 10 years - 2 years

(520000 - 499200 ) / 8  = $20800/8 = $2600

ii) premium on bonds payable

$20800 - $2600 = $18200

cash amount = $520000 * 8% = $41600

intra entity expense and income table is attached below

from the table

iii) intra-entity interest expense = $39000 and the

iv) intra-entity interest income = $44200

v) investment in bonds

purchase price of bonds + annual amortization

= $499200 + $2600 = $501800

the book value on bonds as at 1st January 2011

=$1300000 * 105% = $1365000

Premium on bonds as at January 1st 2011

= $1365000 - $1300000 = $65000

amortization of premium as at January 1st 2011

=( ($65000) / 10 years ) * 2 years

= $13000

hence the controlling interest in bonds payable = $540800

vi) gains on retirement bonds

=  $540800 - $499200 = $41600

attached below is the journal entry on 31st December 2013