Question

Opus, Incorporated, owns 80 percent of Bloom Company. On December 31, 2017, Opus acquires half of Bloom's $700,000 outstanding bonds. These bonds had been sold on the open market on January 1, 2015, at a 12 percent effective rate. The bonds pay a cash interest rate of 10 percent every December 31 and are scheduled to come due on December 31, 2027. Bloom issued this debt originally for $610,070. Opus paid $390,226 for this investment, indicating an 8 percent effective yield.

Assuming that both parties use the effective rate method, what gain or loss from the retirement of this debt should be reported on the consolidated income statement for 2017?

Assuming that both parties use the effective rate method, what balances should appear in the Investment in Bloom Bonds account on Opus’s records and the Bonds Payable account of Bloom as of December 31, 2018?

Assuming that both parties use the straight-line method, what consolidation entry would be required on December 31, 2018, because of these bonds? Assume that the parent is not applying the equity method.

Answer 1

	Opus 80 % bloom Company as on 31.12.17
	Opirs outstanding 50 % $ 7,00,000 i.e $ 3,50,0000
	Interest on Bonds
	31/12/2015	$ 3500	(10% of 3,50,000)
	31/12/2016	$ 3500	(10% of 3,50,000)
	31/12/2017	$ 3500	(10% of 3,50,000)
	Interest income due	$ 10,5000
Note:	In the given question Income statement requried for the Year 2017.
	So no need to entry of retirement of bond. The same should pass
	for the year 2027.