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Several years ago Brant, Inc., sold $900,000 in bonds to the public. Annual cash interest of 9...

Question:

Several years ago Brant, Inc., sold $900,000 in bonds to the public. Annual cash interest of 9 percent ($81,000) was to be paid on this debt. The bonds were issued at a discount to yield 12 percent. At the beginning of 2013, Zack Corporation (a wholly owned subsidiary of Brant) purchased $180,000 of these bonds on the open market for $201,000, a price based on an effective interest rate of 7 percent. The bond liability had a book value on that date of $760,000. Assume Brant uses the equity method to account internally for its investment in Zack. a. & b. What consolidation entry would be required for these bonds on December 31, 2013 and December 31, 2015?

Interest Expenses:

The cost of borrowing funds is known as interest expenses. When the companies borrow funds from the investors then they have to made the repayment of the fund along with the interest. The interest paid is interest expenses.

Answer and Explanation:

Date Account Titles and Explanation Debit Credit
31-Dec-13 Bonds payable $ 154,040
Interest income ($201,000 x 7%) $14,070
Loss on retirement of debt $49,000
Investment in bonds $198,870
Interest expense ($152,000 x 12%) $18,240
Date Account Titles and Explanation Debit Credit
31-Dec-15 Bonds payable $158,884
Interest income $13,761
Interest in Zack $40,266
Investment in bonds $194,152
Interest expense $18,759

Working note:

Calculation of Investment in bonds

Bond value (Open market) $201,000
($I80,000 x 9%) $16,200
($201,000 x 7%) $14,070
$2,130
Investment in bonds $198.870

Loss on the retirement of debt

Bond value (Open market) $201,000
($760,000 x (1/5)) $152,000
Loss on retirement of debt $49.000

Interest expense
12% of book value ($156,325 x 12%) $18.759

Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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