Question

Exercise 6 (LO 2) Bond calculations, effective interest.

Linco Industries is a 90%-owned subsidiary of Sharp Incorporated. On January 1, 2015, Linco issued $100,000 of 10-year, 6% bonds for $86,580, to yield 8% interest. Interest is paid annually on January 1. The effective interest method is used to amortize the premium. Sharp purchased the bonds for $84,901 on January 2, 2018, when the market rate of interest was 9%. On the purchase date, the remaining discount on the bonds was $10,413. Linco’s 2018 net income was $500,000.

1. Prepare the eliminations and adjustments required for this purchase on the December 31, 2018, consolidated worksheet. Amortization schedules will be needed to January 1, 2019.

2. Prepare the 2018 income distribution schedule for the NCI.

Answer 1

1. Preparation of Eliminations as on December 31,2018:

(1)Interest Revenue - L $ 6,000

Interest Expense - L $ 6,000

(2)Interest Payable $ 6,000

Interest Receivable $ 6,000

(3)Discount on B/P $ 1,167

Interest Expense - L $ 1,167

(4)Interest Revenue- L $ 1,641

Investment in Bonds $ 1,641

(5)Bonds Payable $ 100,000

Gain - L $ 4,686

Discount on B/P $ 10,413

($ 100,000 - $ 89,587)

Investment in Bonds $ 84,901

Linco - Issuer (subsidiary)

Date Nominal Interest Effective Interest Amortization Balance

1/2/18 89,587

1/1/19 6,000 7,167 1,167 90,754

1/1/20 6,000 7,260 1,260 92,014

Sharp - Purchaser (parent)

Date Nominal Interest Effective Interest Amortization Balance

1/2/18 84,901

1/1/19 6,000 7,641 1,641 86,542

1/1/20 6,000 7,789 1,789 88,331

2. Income Distribution Schedule:

Linco NI

(4) 1,641	500,000
	1,167 (3)
	4,686 (5)
90% to S 453,791	504,212

50,421 NCI