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:

1. 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.
2. b. Prepare the equity method journal entries that Yessie would make on December 31, Year 2.
3. c. Calculate the amount of bond liability that will appear on December 31, Year 2, on the consolidated statement of financial position.

Answer rating: 100% (QA)

a Yessie Corporation Gain or loss on bonds 92000 92000 x 7 x 15 12... View the full answer