Question

Cairns owns 75 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 $1,200,000 in 10-year bonds to the public at 105. The bonds had a cash interest rate of 7 percent payable every December 31. Cairns acquired 35 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. Dec 31 2013, Dec 2014. and Dec 2015

Answer 1

b)In 2014, because straight line amortization is used, the interest accounts remain unchanged at $31,500 and $27,300. However, the premium associated with the bond payable as well as the discount on the investment are affected by the $21000 per year amortization. In addition, the gain now has to be removed from the Investment in Hamilton account. Concurrently, the two interest balances recorded by the individual companies in 2014 are removed from the Investment in Hamilton because they occurred after the intra-entity retirement. Gain of $33,600 plus $27,300 expense removal less $31,500 income elimination yields a $29,400 credit to the investment account

c)In 2015 , same as b explanation