Question

1. Choco owns 70% of Cake. On 1/1/2015, Cake issued $800,000 10 years bond at 6%. Cake issued the bond at $724,000, with effective interest of 7%. On 1/1/2016, Choco purchased all of Cake’s bond for $886,000 with effective interest at 5% and Cake’s bond has been effectively retired.

date	Cash interest	Effective interest	Amortization of bond discount	BV
1/1/2015				800,000-76,000 = 721,000
12/31/2015	24,000	2,5340	1,340	725,340
12/31/2016	24,000	25,386.9	13869.9	726726.9

Calculate the amount of gain or loss from this transaction to be recognized in consolidated statements on 12/31/2016

Make a journal entry that Cake will record regarding the bond interest expense on 12/31/2016.

Make a journal entry that Choco will record regarding the 1/1/2016 investment on bond, and bond interest expense on 12/31/2016.

1/1/16
12/31/16

Prepare consolidation entry B on 12/31/2016.

Answer 1

1. Calculation of amount of gain or loss from this transaction to be recognized in consolidated statements on 12/31/2016

Ans. = 886000-726726.9

= 159273.1

2. Make a journal entry that Cake will record regarding the bond interest expense on 12/31/2016.

Ans. Cash 724000

Discount B/P 76000

B/P 800000

(in question 800000-76000=721000 this is not correct it must be 724000. i taken 724000 for this question)

3.Make a journal entry that Choco will record regarding the 1/1/2016 investment on bond, and bond interest expense on 12/31/2016.

Ans.

1/1/2016 Investment in Cakes Bond 886000

cash 886000

12/31/2016 Cash 48000

Investment in choco bonds 3700

Interest Rev. 44300

4.Prepare consolidation entry B on 12/31/2016

  

Ans. Interesr rev. 44300

B/P 800000

loss 159273.1

Discount on B/P 70450

Interest expense 50868