ch 8 bond illustration

ch 8 bond illustration - EXAMPLE Assume that P owns 90% of...

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1EXAMPLE Assume that P owns 90% of S. On 1/1/x1 S had issued $500,000 worth of 10%, 10 year bonds for $450,000. On 1/1/x7 P purchased $100,000 of these bonds for $110,000. Interest is paid semi-annually on July 1 and January 1. S's reported net income in x7, x8, x9 and x10 is $50,000/year. Sub = Issuer total interco Bonds Payable 500,000 100,000 1/1/x7 Discount Balance: 50,000 x 4/10 20,000 4,000 Amortization: 20,000/4 (5,000) (1,000) 12/31/x7 Discount Balance 15,000 3,000 12/31/x8 Discount Balance 10,000 2,000 12/31/x9 Discount Balance 5,000 1,000 12/31/x10 Discount Balance 0 0 Intercompany interest expense (100,000 x 10%) + 1,000 = $11,000 Parent = Purchaser Bonds Investment 110,000 Amortization of Premium: 10,000/4 (2,500) 12/31/x7 Balance 107,500 12/31/x8 Balance 105,000 12/31/x9 Balance 102,500 12/31/x10 Balance 100,000 Intercompany Interest Income (100,000 x 10%) – 2,500 = $7,500 Assume an intercompany loss on retirement of bonds payable: bonds payable (net) 96,000 paid off for 110,000 loss = 14,000 Each year must adjust interest income/expense: Expense 11,000 Income 7,500 3,500 1
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(REVIEW from Intermediate) Accounting by S 1/1/01 Cash 450,000 Discount on Bonds Payable 50,000 Bonds Payable 500,000 7/1/(each year) Interest Expense 25,000 Cash 25,000 (10%x $500,000=$50,000)x 6/12 12/31/(each year) Interest Expense 25,000 Interest Payable 25,000 (10%x $500,000=$50,000)x 6/12 Interest Expense 5,000 Discount on Bonds Payable 5,000 ($50,000/10yr) 1/1/(each year) Interest Payable 25,000 Cash 25,000 (REVIEW from Intermediate) Accounting by P 1/1/07 Investment in Bonds 110,000
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This note was uploaded on 04/18/2008 for the course ACCT cost taught by Professor Staff during the Spring '08 term at Oklahoma State.

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ch 8 bond illustration - EXAMPLE Assume that P owns 90% of...

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