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Stallion Corporation sold $190,000 par value, 10-year first mortgage bonds to Pony Corporation on January 1, 20X5. The bonds, which bear a nominal interest rate of 10 percent, pay interest semiannually on January 1 and July 1. The entry to record interest income by Pony Corporation on December 31, 20X7, was as follows:
Note: Assume using straight-line amortization of bond discount or premium.
General Journal Debit Credit
Interest Receivable 9,500
Interest Income 9,025
Investment in Stallion Corporation Bonds 475
Pony Corporation owns 65 percent of the voting stock of Stallion Corporation, and consolidated statements are prepared on December 31, 20X7.
Required:
A. What was the original purchase price of the bonds to Stallion Corporation?
B. What is the balance in Pony's bond investment account on December 31, 20X7?
C. Prepare the worksheet elimination entry or entries needed to remove the effects of the intercompany ownership of bonds in preparing consolidated financial statements for 20x7.
• Record the entry to eliminate the effects of the intercompany ownership in the bonds.
• Record the entry to eliminate the intercompany interest receivables/payables.

Sagot :

Tundexi

Answer:

a. Amortization of Bond Premium semi-annual = $475

Amortization of Bond Premium annual = $475*2 = $950

Bond Premium = $950*10 years = $9,500

Par value of Bonds          $190,000

Premium on Bonds          $9,500

Original Price of Bonds  $199,500

b.  Original Purchase Price = $199,500

Semi-annual periods from Jan 1,20X5 - Dec 31,20X7 = 3 yrs*2 = 6 periods

Premium amortization till Dec 31, 20X7 = $475*6 = $2,850

Balance in Bond Investment account = $199,500 - $2,850

Balance in Bond Investment account = $196,650

c. Event Accounts & Explanation                     Debit         Credit

      1.       Bonds Payable                                  $190,000

               Bond Premium ($9,500 - $2,850)    $6,650  

                Interest Income ($9,025*2)              $18,050  

                       Investment in Stallion Corporation Bonds   $196,650

                       Interest Expense                                            $18,050

                (To record the entry to eliminate the effects of the

                 inter-company ownership in the bonds)

    2.        Interest Payable                                  $9,500

                        Interest Receivable                                         $9,500

                 (To record the entry to eliminate the inter-company

                  interest receivables/payable)

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