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  • Jul 9, 2008, 08:41 PM
    geoschl
    bond journal entries
    Fargus Corporation owned 51% of the voting common stock of Manatee, 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 purchase price.
    On January 1, 2005, Manatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a cash, or stated, interest rate of 10% payable every December 31. Fargus acquired 40% of these bonds on January 1, 2006, at an effective interest rate of 11 percent.

    Required:

    (a) (20 points) What consolidation journal entry would have been recorded in connection
    with these intercompany bonds on December 31, 2006?
    Here is the work I did to get journals:



    Decenber 31, 2006 consolidated journal entry.

    Bond Payable 560000
    Interest income 61600
    Premium on bond 40320-4480 31360
    Investment in bonds 560000
    Interest Expense 51520
    Extraordinary gain on 40320
    retirement of bonds.

    Question 2a

    Book value of bonds payable
    Book value, January 1, 2005 $1,512,000 $112,000 premium for 10 years = $11,200
    Amortization (1 year) (11,200)
    Book value, January 1, 2005 $1,500,800

    Book value of 40% of bonds payable $600,320
    intercompany portion



    Gain on retirement of bonds Jan. 1, 2006
    Purchase Price $560,000
    Book value of liability, from above 600,320
    Gain on retirement of bonds $40,320

    Book value of bonds payable
    Book value January 1, 2005 $1,500,800
    Amortization for 2005 (11,200)
    Book value December 31, 2005 $1,489,600
    Book value of 40% if bonds payable $595,840
    December 31.

    Book value of investment December 31, 2006
    Book value of investment, January 1, 2006
    Purchase Price $560,000



    Interest Expense:
    Cash payment $560,000 x 10% = $56,000
    Amortization of premium for 2006 (4,480)
    $11,200 per year x 40% intercompany
    $51,520 Inter company interest expense
    Interest income:
    Cash Collection $560,000 x 11% $61,600

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