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