Question

Assume the same facts as in E8-3 but prepare entries using straight-line amortization of bond discount or premium.

Purse Corporation owns 70 percent of Scarf Company’s voting shares. On January 1, 20X3, Scarf sold bonds with a par value of $600,000 at 98. Purse purchased $400,000 par value of the bonds; the remainder was sold to nonaffiliates. The bonds mature in five years and pay an annual interest rate of 8 percent. Interest is paid semiannually on January 1 and July 1.

Required

1. What amount of interest expense should be reported in the 20X4 consolidated income statement?

2. Give the journal entries Purse recorded during 20X4 with regard to its investment in Scarf bonds.

3. Give all worksheet consolidation entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements for 20X4.

prepare entries using straight-line amortization of bond discount or premium.

Answer 1

Solution:-

a. Interest expenses = value of bonds to non affiliates x interest rate + amortization of discount
= [($600000 - 400000) x 0.08] + [{($600000 - 400000) x 0.02} / 5 years]
= $16000 + $800

= $16,800

b.

Date	General Journal	Debit	Credit
Jan 1, 20X4	Cash (400000 x 8% for half year)	$32,000
	Interest Receivable		$32,000
July 1	Cash (400000 x 8% for half year)	$32,000
	Investment in bonds (450000 x 2% for ten periods)	$800
	Interest Revenue		$32,800
	(To record accrual of interest and amortized 1/10 of bond discount)
Dec 31	Cash (400000 x 8% for half year)	$32,000
	Investment in bonds (400000 x 2% for ten periods)	$800
	Interest Revenue		$32,800
	(To record accrual of interest and amortized 1/10 of bond discount)