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Chapter 08 - Intercompany Indebtedness
E8-8 Constructive Retirement at Beginning of Year
Face Value
of Bonds
PMT #
Interest $
PMT
Interest
Income
Amort of
Discount
(Premium)
Premium (Discount)
Bonds
Payable
BV of Bonds
400,000.00
1/1/20X5 ($3,200.00) 400,000.00 $396,800.00
Stated rate = 1 7/1/20X5 18,000.00 18,046.19 46.19 ($3,153.81) 400,000.00 $396,846.19
9% 2 1/1/20X6 18,000.00 18,048.30 48.30 ($3,105.51) 400,000.00 $396,894.49
Annual 3 7/1/20X6 18,000.00 18,050.49 50.49 ($3,055.02) 400,000.00 $396,944.98
Years = 4 1/1/20X7 18,000.00 18,052.79 52.79 ($3,002.23) 400,000.00 $396,997.77
16
5 7/1/20X7 18,000.00 18,055.19 55.19 ($2,947.04) 400,000.00 $397,052.96
Mkt Rate = 6 1/1/20X8 18,000.00 18,057.70 57.70 ($2,889.34) 400,000.00 $397,110.66
9.096% 7 7/1/20X8 18,000.00 18,060.32 60.32 ($2,829.02) 400,000.00 $397,170.98
8 1/1/20X9 18,000.00 18,063.07 63.07 ($2,765.95) 400,000.00 $397,234.05
9 7/1/20X9 18,000.00 18,065.94 65.94 ($2,700.02) 400,000.00 $397,299.98
10 1/1/20X10 18,000.00 18,068.93 68.93 ($2,631.08) 400,000.00 $397,368.92
11
7/1/20X10 18,000.00 18,072.07 72.07 ($2,559.01) 400,000.00 $397,440.99
12 1/1/20X11 18,000.00 18,075.35 75.35 ($2,483.67) 400,000.00 $397,516.33
13 7/1/20X11 18,000.00 18,078.77 78.77 ($2,404.89) 400,000.00 $397,595.11
19
20 1/1/20X15 18,000.00 18,107.54 107.54 ($1,743.51) 400,000.00 $398,256.49
21 7/1/20X15 18,000.00 18,112.43 112.43 ($1,631.07) 400,000.00 $398,368.93
22 1/1/20X16 18,000.00 18,117.55 117.55 ($1,513.53) 400,000.00 $398,486.47
23
7/1/20X16 18,000.00 18,122.89 122.89 ($1,390.63) 400,000.00 $398,609.37
24 1/1/20X17 18,000.00 18,128.48 128.48 ($1,262.15) 400,000.00 $398,737.85
25 7/1/20X17 18,000.00 18,134.33 134.33 ($1,127.82) 400,000.00 $398,872.18
26 1/1/20X18 18,000.00 18,140.44 140.44 ($987.38) 400,000.00 $399,012.62
27
7/1/20X18 18,000.00 18,146.82 146.82 ($840.56) 400,000.00 $399,159.44
28 1/1/20X19 18,000.00 18,153.50 153.50 ($687.06) 400,000.00 $399,312.94
29 7/1/20X19 18,000.00 18,160.48 160.48 ($526.58) 400,000.00 $399,473.42
31 7/1/20X20 18,000.00 18,175.41 175.41 ($183.39) 400,000.00 $399,816.61
32 1/1/20X21 18,000.00 18,183.39 183.39 ($0.00) 400,000.00 $400,000.00
Chapter 08 - Intercompany Indebtedness
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Consolidation entries, December 31, 20X8:
Bonds Payable
100,000
Interest Income
8,676
Loss on Bond Retirement
11,383
Investment in Apple Corp Bonds
104,676
Discount on Bonds Payable
4,258
Interest Expense
11,125
Interest Payable
5,000
Interest Receivable
5,000
The basic entry (not shown) would be adjusted by 8,934 (8,676+11,383-
11,125=8,676) to complete the elimination process.
Chapter 08 - Intercompany Indebtedness
a.
Par value of bonds outstanding
$200,000
Annual interest rate
x 0.12
Interest payment
$ 24,000
Amortization of bond premium
($2,920 + $3,041)
(5,961)
Interest charge for full year
$ 18,039
Less: Interest on bond purchased by Online Enterprises
($8,959 x 1/2)
(4,480)
Interest expense included in consolidated
income statement
$ 13,560
b.
Sale price of bonds, January 1, 20X1
$115,000
Amortization of premium (2 ½ years)
(6,742)
Book value at time of purchase
$108,258
Purchase price
(100,000)
Gain on bond retirement
$ 8,258
c.
Consolidation entries, December 31, 20X3:
Bonds Payable
100,000
Bond Premium
6,737
Interest Income
6,000
Investment in Downlink Bonds
100,000
Interest Expense
4,479 *
Gain on Bond Retirement
8,258
Interest Payable
6,000
Interest Receivable
6,000
The basic entry (not shown) would be adjusted by 6,737 (4,479+8,258-
6,000=6,737) to complete the elimination process.
* $1 rounding difference between calculations in part a and entry in part c
