Question

Cairns owns 75 percent of the voting stock of Hamilton, 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 acquisition. Cairns uses the equity method in its internal records to account for its investment in Hamilton. On January 1, 2017, Hamilton sold $2,200,000 in 10 -year bonds to the public at 105 . The bonds had a cash interest rate of 8 percent payable every December 31 . Cairns acquired 45 percent of these bonds at 96 percent of face value on January 1,2019 . Both companies utilize the straight-line method of amortization. Prepare the consolidation worksheet entries to recognize the effects of the intra-entity bonds at each of the following dates. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) a. December 31,2019 b. December 31, 2020 c. December 31, 2021

Answer 1

a. December 31, 2019: No journal entry required.

b. December 31, 2020: Debit Investment in Bonds - Hamilton, Credit Bond Interest Income, Credit Investment in Bonds - Amortization.

c. December 31, 2021: Debit Investment in Bonds - Hamilton, Credit Bond Interest Income, Credit Investment in Bonds - Amortization.

Step-by-step explanation:

a. On December 31, 2019, no journal entry is required as the bonds were acquired on January 1, 2019, and no interest payment or amortization event has occurred by the end of the year.

b. On December 31, 2020, we recognize the interest income related to Cairns' 45 percent ownership of Hamilton's bonds.

The entry involves debiting "Investment in Bonds - Hamilton" to reflect the increase in value and crediting "Bond Interest Income" for the interest earned. Additionally, "Investment in Bonds - Amortization" is credited to account for the amortization of the bond premium.

c. By December 31, 2021, another interest income entry is made as the bonds continue to generate interest. The amortization entry is repeated, adjusting the carrying value of the investment.

This process ensures accurate financial reporting, reflecting both the interest income and the amortization of the bond premium in Cairns' consolidated financial statements.

Answer 2

To prepare the consolidation worksheet entries for the effects of the intra-entity bonds on December 31 of each year, the following entries should be recorded: debit interest expense and investment in bonds, and credit interest income.

Step-by-step explanation:

To prepare the consolidation worksheet entries for the effects of the intra-entity bonds on December 31 of each year, we need to account for the interest expense and interest income related to the bonds. Here are the entries for each date:

a. December 31, 2019:

Debit: Interest Expense ($2,200,000 x 8% x 1 year) = $176,000

Debit: Investment in Bonds ($2,200,000 x 45%) = $990,000

Credit: Interest Income ($2,200,000 x 8% x 45%) = $79,200

b. December 31, 2020:

Debit: Interest Expense ($2,200,000 x 8% x 2 years) = $352,000

Debit: Investment in Bonds ($2,200,000 x 45%) = $990,000

Credit: Interest Income ($2,200,000 x 8% x 45%) = $79,200

c. December 31, 2021:

1. Debit: Interest Expense ($2,200,000 x 8% x 3 years) = $528,000
2. Debit: Investment in Bonds ($2,200,000 x 45%) = $990,000
3. Credit: Interest Income ($2,200,000 x 8% x 45%) = $79,200

These entries reflect the interest expense incurred by Hamilton and the interest income earned by Cairns from the intra-entity bonds.