Answered Essay: Wood Corporation owns 70 percent of Carter Company’s voting shares. On January 1, 20X3, Carter sold bonds with

Wood Corporation owns 70 percent of Carter Company’s voting shares. On January 1, 20X3, Carter sold bonds with a par value of $742,500 at 98. Wood purchased $495,000 par value of the bonds; the remainder was sold to nonaffiliates. The bonds mature in five years and pay an annual interest rate of 8 percent. Interest is paid semiannually on January 1 and July 1.

a. What amount of interest expense should be reported in the 20X4 consolidated income statement?

b.1-b.3. Prepare the journal entries Wood recorded during 20X4 with regard to its investment in Carter bonds. (If no entry is required for a transaction/event, select “No journal entry required” in the first account field. Round your market rate of interest to 3 decimals. For example, .0547523 should be rounded to 5.475%)

b.1 January 01: Record the interest received on the bonds.

b.2 July 01: Record the interest received on the bonds.

b.3 December 31: Record the interest receivable on the bonds.

c1-c2: Prepare all worksheet consolidation entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements for 20X4.

c1. Record the entry to eliminate the effects of the intercompany ownership in the bonds.

c2. Record the entry to eliminate the intercompany interest receivables/payables.

Expert Answer

 

Answer

a. What amount of interest expense should be reported in the 20X4 consolidated income statement?

Par value of bond $ 742,500
annual interest rate of 8 percent $    59,400
Payable to Wood Corporations $    39,600
Payable to nonaffiliates. $    19,800
interest expense to be reported in the 20X4 consolidated income statement $    19,800

b.1-b.3. Prepare the journal entries Wood recorded during 20X4 with regard to its investment in Carter bonds.

Date General Journal in woods corporations Debit Credit
January 1, 20X4 Cash A/c $ 19,800
To Intesrest on Bonds $ 19,800
( Record the interest received on the bonds. )
July 1, 20X4 Cash A/c $ 19,800
To Intesrest on Bonds $ 19,800
( Record the interest received on the bonds. )
December 31, 20X4 Cash A/c $ 59,400
To Intesrest on Bonds $ 59,400
( Record the interest receivable on the bonds )

c1-c2: Prepare all worksheet consolidation entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements for 20X4.

c1. Record the entry to eliminate the effects of the intercompany ownership in the bonds.

No entry required

c2. Record the entry to eliminate the intercompany interest receivables/payables.

January 1, 20X4 Carter Company $ 39,600
To Wood Corporations $ 39,600
( Record the interest received on the bonds. )
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