Question
Yessie Corporation owns 80% of the ordinary shares of Zuma Corporation and uses the Equity method to account for its investment. On January 1, Year
Yessie Corporation owns 80% of the ordinary shares of Zuma Corporation and uses the Equity method to account for its investment.
On January 1, Year 2, Yessie purchased 100,000 of Zuma’s 12% bonds for $92,000. Zuma’s bond liability of this date consisted of 400,000 par 12% bonds due January 1, Year 6 and unamortized discount of $50,000. Interest payment dates are June 30 and December 31. The effective rate of interest is 7% every six months for Yessie’s bond investment and 7.5% every six months for Zuma’s bond liability.
Both companies have a December 31 year-end and use the effective-interest rate method to account for the bonds. Yessie uses income tax allocation at a 40% tax rate when it prepares its consolidated financial statements.
Zuma reported a profit of $75,000 in Year 2 and declared a dividend of $15,000 on December 31.
Required: Follow the in-class/video explained process to answer the following questions:
- a. Calculate the amount of gain or loss that will appear as a separate item on the Year-2 consolidated income statement as a result of the bond transaction that occurred during the year.
- b. Prepare the equity method journal entries that Yessie would make on December 31, Year 2.
- c. Calculate the amount of bond liability that will appear on December 31, Year 2, on the consolidated statement of financial position.
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