Question

Plug Corporation purchased $100,000 par value bonds of its subsidiary, Spark Company, on December 31, 20X5, from Lemon Corporation for $102,800. The 10-year bonds bear a 9 percent coupon rate, and Spark originally sold them on January 1, 20X3, to Lemon at 95. Interest is paid annually on December 31. Plug owns 85 percent of the stock of Spark.
In preparing the consolidation worksheet at December 31, 20X6, Plug’s controller made the following entry to eliminate the effects of the intercorporate bond ownership:

Bonds Payable 100,000
Interest Income 8,600
Retained Earnings, January 1 5,355
Noncontrolling Interest 945
Investment in Spark Company Bonds 102,400
Discount on Bonds Payable 3,000
Interest Expense 9,500

Required:
(a) What amount did Plug pay when it purchased Spark’s bonds?
(b) Prepare the journal entry made by Spark in 20X6 to record its interest expense for the year.
(c) Prepare the journal entry made by Plug in 20X6 to record its interest income on the Broadway bonds that it holds.
(d) Prepare the eliminating entry to remove the effects of the intercorporate bond ownership in completing a three-part consolidation worksheet at December 31, 20X5.

Answer 1

Answer:

a) Purchase price = $102,800

b) Debit Interest Expense $9,500 Credit Bank $9,000 Credit Discount on Bond Payable $500

c) Debit Bank $9,000 Credit Interest income $8,600 Credit Investment $400

d) Debit Bond Payable $100,000 Debit Loss on Bond $6,300 Credit Investment $102,800 Credit Discount on Bond payable $3,500

Explanation:

Discount on bond Payable = (3000/6) = $500

Investment : Amortize premium (2,400/6) =$400

Loss on Bond is the balancing figure $6,300