Pachelor Corporation owns 70% of the outstanding stock of Stabb Company. On January 1, 2013, Stabb issued $1,000,000 in 7% bonds that matured on January 1, 2018
At the time of issuance, the bonds were sold at a discount of $125,000. At January 2, 2015, Pachelor purchased the bonds for $1,400,000, and constructively retired the debt. Interest is paid annually on January 1. Straight-line amortization is used by both companies.
Required:
1. Calculate the gain or loss that the consolidated entity incurred to retire the debt.
2. Prepare eliminating/adjusting entries for the consolidating work papers for the year ended
December 31, 2015.
What will be an ideal response?
Requirement 1:
Book value of bonds at time of retirement =
($1,000,000 - $125,000 + [($125,000 / 5 years) × 2]) = $ 925,000
Purchase price of bonds = 1,400,000
Constructive loss on retirement of bonds $ 475,000
Requirement 2:
December 31, 2015:
Interest payable 70,000
Interest receivable 70,000
($1,000,000 × 7%)
Loss on retirement of bonds 316,667
Bonds payable 1,000,000
Discount on bonds payable 50,000
Bond investment 1,266,667
(Bond investment: $1,400,000 - $400,000/3)
(Bond discount: $25,000 × 2)
Loss on retirement of bonds 158,333
Interest expense 95,000
Interest income 63,333
Interest expense:
[($1,000,000 × 7%) + $125,000/5] = $70,000 + $25,000 = $95,000
Interest income:
($400,000/3) - ($1,000,000 × 7%) = $133,333 - $70,000 = $63,333 (Debit balance)
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