Alpha Corporation owns 90% of the ordinary shares of Beta Corporation and uses the equity method to account for its investment. On January 1, Year 4, Alpha purchased $160,000 of Beta’s 10% bonds for $150,064. Beta’s bond liability on this date consisted of $800,000 par 10% bonds due January 1, Year 8, and unamortized discount of $73,065. Interest payment dates are June 30 and December 31. The effective rate of interest is 6% every six months on Alpha’s bond investment and 6.5% every six months for Beta’s bond liability.
Both companies have a December 31 year-end and use the effective-interest method to account for bonds. Alpha uses income tax allocation at a 40% tax rate when it prepares its consolidated financial statements.
Beta reported a profit of $114,000 in Year 4 and declared a dividend of $30,000 on December 31.
Required:
(a) Calculate the amount of the gain or the loss that will appear as a separate item on the Year 4 consolidated income statement as a result of the bond transaction that occurred during the year.
(b) Prepare the equity method journal entries that Alpha would make on December 31, Year 4.
(c) Calculate the amount of the bond liability that will appear on the December 31,
Year 4, consolidated statement of financial position.