Question

Plat Incorporated purchased 80% of Scar Company several years ago when the fair value equaled the book value. On January 1, 2019, Scar has $100,000 of 8% bonds that were issued at face value and have five years to maturity. Interest is paid annually on December 31. On January 1, 2020, Plat purchased all of Scar's bonds for $96,000. Both Plat and Scar would use the straight-line method to amortize any premium or discount incurred in the issuance or purchase of bonds.

Required: 1.Calculate gain/loss from the effective retirement on January 1, 2020; (specify if gain or loss) 2. Calculate the annual interest expense/revenue for Scar and Plat for 2020; 3.Prepare the consolidating working paper entries required for the year ending December 31, 2020.

Answer 1

Answer:

1.

a) On 1st January, 2020, in the books of Plat Inc.

Investment in Bonds 100,000
To Bank 96,000
To Discount on bond Investment    4,000

b) No entry in the books of Scar Company

2.

a) On 31st December, 2020, in the books of Plat Inc.

Cash 8,000

Discount on bond Investment 1,000

To, Interest income 9,000
(To record the interest receivable along with amortisation of discount on bond investment(4000/4yrs) for the year )

b) On 31st December, 2020, in the books of Scar Company

Interest expense(100000*8%) 8000
To Cash 8000

3. Consolidating working paper entry

Bonds Payable 100,000

Interest income 9,000

Discount on bond Investment 3,000

To Investment in Bonds 100,000

To Interest expense 8,000

To Profit on Bond retirement (Bal fig.) 4,000