Question

Cairns owns 70 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, 2014, Hamilton sold $1,100,000 in 10-year bonds to the public at 110. The bonds had a cash interest rate of 8 percent payable every December 31. Cairns acquired 45 percent of these bonds at 92 percent of face value on January 1, 2016. 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) December 31, 2016 Prepare Entry B to eliminate accounts stemming from intra-entity bonds and to recognize the gain on the effective retirement of this debt. December 31, 2017 Prepare Entry *B to remove the intra-entity bond accounts that remain on the individual records of both companies. December 31, 2018 Prepare Entry *B to remove the intra-entity bond accounts that remain on the individual records of both companies.

Answer 1

b. In 2017, because straight-line amortization is used, the interest accounts remain unchanged at $44550 and $34,650. However, the premium associated with the bond payable as well as the discounts on   the investment are affected by the $4950 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 2017 are removed from the Investment in Hamilton because they occurred after the intra-entity retirement. Gain of $79200 plus $34,650 expense removal less $44550 income elimination yields a $69,300 credit to the investment account.

c. As with part b, new premium and discount balances must be determined and then removed. The adjustment made to the Investment in Hamilton takes into account that another year of interest expense ($34,650) and income ($44,550 )have been incorporated into the investment account through application of the equity method.