Question

everal years ago Brant, Inc., sold $960,000 in bonds to the public. Annual cash interest of 7 percent ($67,200) was to be paid on this debt. The bonds were issued at a discount to yield 10 percent. At the beginning of 2019, Zack Corporation (a wholly owned subsidiary of Brant) purchased $120,000 of these bonds on the open market for $141,000, a price based on an effective interest rate of 5 percent. The bond liability had a carrying amount on that date of $820,000. 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, 2019 and December 31, 2021? (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate calculations and final answers to nearest whole number.) view transaction list Consolidation Worksheet Entries <. 1 2 Prepare Consolidation Entry B to account for these bonds on December 31, 2019. Note: Enter debits before credits. Date. Accounts Debit Credit December 31, 2019 Bonds payable Interest income Loss on retirement of debt Investment in bonds Interest expense

Answer 1

When interest rates rise, the value of existing bonds typically decreases. To calculate what you would be willing to pay for a bond, you can use the present value formula.

Step-by-step explanation:

a. When interest rates rise, the value of existing bonds typically decreases. This is because investors can now earn higher interest rates elsewhere, so they are less willing to pay a higher price for a bond with a lower interest rate.

b. To calculate what you would be willing to pay for the bond, you can use the present value formula. In this case, we need to calculate the present value of the remaining cash flows (interest payments and principal repayment) using the new discount rate of 9%.

The formula to calculate the present value of a bond is:

PV = C/(1+r)^n + C/(1+r)^(n-1) + ... + C/(1+r) + M/(1+r)^n

Where PV is the present value, C is the cash flow, r is the discount rate, n is the number of periods, and M is the maturity value.