Question
Smart Company issued $120,000 of 10 percent bonds on January 1, 20X1, at 120. The bonds mature in 10 years and pay 10 percent interest
Smart Company issued $120,000 of 10 percent bonds on January 1, 20X1, at 120. The bonds mature in 10 years and pay 10 percent interest annually on December 31. Phone Corporation holds 80 percent of Smarts voting shares, acquired on January 1, 20X1, at underlying book value. On January 1, 20X4, Phone purchased Smart bonds with a par value of $49,500 from the original purchaser for $54,450. Phone uses the modified equity method in accounting for its ownership in Smart. Partial balance sheet data for the two companies on December 31, 20X5, are as follows:
Phone Corporation | Smart Company | |||||||
Investment in Smart Company Stock | $ | 144,000 | ||||||
Investment in Smart Company Bonds | 53,298 | |||||||
Interest Income | 4,352 | |||||||
Bonds Payable | $ | 120,000 | ||||||
Bond Premium | 14,047 | |||||||
Interest Expense | 9,726 | |||||||
Common Stock | 300,000 | 100,000 | ||||||
Retained Earnings, December 31, 20X5 | 500,000 | 50,000 | ||||||
Required: a. Compute the gain or loss on bond retirement reported in the 20X4 consolidated income statement. b. Prepare the consolidation entry needed to remove the effects of the intercorporate bond ownership in completing the consolidation worksheet for 20X5. c. What balance should be reported as consolidated retained earnings on December 31, 20X5?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started