Determining the Amount of Retirement Gain or Loss (Effective Interest Method)

Online Enterprises owns 95 percent of Downlink Corporation. On January 1, 20X1, Downlink issued $200,000 of five-year bonds at 115. Annual interest of 12 percent is paid semiannually on January 1 and July 1. Online purchased $100,000 of the bonds on August 31, 20X3, at par value. The following balances are taken from the separate 20X3 financial statements of the two companies:

online enterprise

investment in downlink corp bonds 100000

interest income 6000

interest recievible 6000

downlink corp

bond payable 200,000

bond premium 13475

interest expense 18039

interest payable 12000

Required

a. Compute the amount of interest expense that should be reported in the consolidated income statement for 20X3.

b. Compute the gain or loss on constructive bond retirement that should be reported in the 20X3 consolidated income statement.

c. Prepare the consolidation worksheet consolidation entry or entries as of December 31, 20X3, to remove the effects of the intercorporate bond ownership.