Business, 06.03.2021 01:00 paula1172

Pepper Enterprises owns 95 percent of Salt Corporation. On January 1, 20X1, Salt issued $220,000 of five-year bonds at 115. Annual interest of 10 percent is paid semiannually on January 1 and July 1. Pepper purchased $120,000 of the bonds on August 31, 20X3, at par value. The following balances are taken from the separate 20X3 financial statements of the two companies: Note: Assume using straight-line amortization of bond discount or premium. Pepper Enterprises Salt Corporation Investment in Salt Corporation Bonds $ 125,700 Interest Income 4,367 Interest Receivable 6,000 Bonds Payable $ 220,000 Bond Premium 20,600 Interest Expense 15,400 Interest Payable 12,000 Required:
a. Compute the amount of interest expense that should be reported in the consolidated income statement for 20X3.
b. Compute the gain or loss on constructive bond retirement that should be reported in the 20X3 consolidated income statement.
c. Prepare the consolidation worksheet consolidation entry or entries as of December 31, 20X3, to remove the effects of the intercorporate bond ownership.

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Answer from: ijeomaokoro2264

Solution :

a).

Par value of the bonds outstanding 220,000

Annual interest rate x 10%

Interest payment 220,000

Amortization of the bonds premium 6600 $\left( \frac{220,000 \times 15\%}{5}\right)$

Interest charged for full year 15400

Less:interest on the bond purchased 2567

by Online Enterprise (15400 x 1/2) x

(4 months / 12 months)

Interest expense included in the consolidated 12833

income statement

b).

Sale price of bonds, 1 Jan 20x1 138,000

(120,000 x 115%)

Amortization of premium 9600 $\left(\frac{\$120,000 \times 15\%}{5 \ yrs} \times 2\frac{2}{3}\right)$

Book value at time of purchase 128,400

Purchase price 120,000

Gain on bond retirement 8400

c).

Events Accounts Debit Credit

1 Bonds payable 120,000

Bonds premium 6600

interest income 4367

investment in Salt bonds 120,000

Interest expense 2567

Gain on bond retirement 8400

2 interest payable 8100

(4950+11900+8750)

Interest receivable 8100

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Pepper Enterprises owns 95 percent of Salt Corporation. On January 1, 20X1, Salt issued $220,000 of...