Question

Breaux possesses a 70% interest in the outstanding stock of Keller. On January 1, 2013, Keller issued $1 million in 20 year bonds, paying 9% interest annually. Keller sold the debt for $940,000 to yield an effective rate of 10% per year. On January 1, 2014, Breaux purchased all of the debt on the open market for $1,057,000. This price was based on an effective rate of 8%. At January 1, 2015, the unamortized discount and book value of the debt was $50,600 and $949,400 respectively.

Required:

Prepare the December 31, 2015, consolidation entries necessitated by the retirement of the debt by Keller and subsequent purchase of the debt by Breaux. The parent uses the equity method to account for the investment.

Answer 1

Answer :

Breaux Entries

When Breaux purchased the debt, it records the debt as along term account. This transaction is recorded at cost

Investment In keller	1,057,000	-
Cash		1,057,000

When lion receives interest from the debt of 75,200(940,000*8%).This records a reduction in the investment account and Amortize the premium on the purchase (117,000) for 18 years which is 6,500 for one year

Cash	75,200	-
Investment in Keller		75,200
Premium on investment		6,500

Keller Entries

On the data of issuance of debt

Cash	940,000	-
Discount on debt	50,600	-
Debt payable		990,600

On the record of interest every year, on the amortization of the discoun

Debt payable	9,400	-
Cash		9,400
Discount on debt		2,811