Smart Company issued $100,000 of 10 percent bonds on January 1, 20X1, at 120. The bonds mature
Question:
Smart Company issued $100,000 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 Smart’s voting shares, acquired on January 1, 20X1, at underlying book value. On January 1, 20X4, Phone purchased Smart bonds with a par value of $40,000 from the original purchaser for $44,000. 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 | | $120,000 | | |
Investment in Smart Company Bonds | | 43,069 | | |
Interest Income | | 3,517 | | |
Bonds Payable | | | | $100,000 |
Bond Premium | | | | 11,706 |
Interest Expense | | | | 8,105 |
Common Stock | | 300,000 | | 100,000 |
Retained Earnings, December 31, 20X5 | | 500,000 | | 50,000 |
Required
Compute the gain or loss on bond retirement reported in the 20X4 consolidated income statement.
Prepare the consolidation entry needed to remove the effects of the intercorporate bond ownership in completing the consolidation worksheet for 20X5.
What balance should be reported as consolidated retained earnings on December 31, 20X5?
Advanced Financial Accounting
ISBN: 978-0078025624
10th edition
Authors: Theodore E. Christensen, David M. Cottrell, Richard E. Baker