Determining the Amount of Retirement Gain or Loss (Straight-Line Method)
Online Enterprises owns 95 percent of Downlink Corporation. On January 1, 20X1, Downlink issued $200,000 of five-year bonds at 115. Annual interest of 12 percent is paid semiannually on January 1 and July 1. Online purchased $100,000 of the bonds on August 31, 20X3, at par value. The following balances are taken from the separate 20X3 financial statements of the two companies:
Online Enterprises
Downlink Corporation
Investment in Downlink Corporation Bonds
$105,700
Interest Income
4,000
Interest Receivable
6,000
Bonds Payable
$200,000
Bond Premium
12,000
Interest Expense
18,000
Interest Payable
Required
a. Compute the amount of interest expense that should be reported in the consolidated income statement for 20X3.
b. Compute the gain or loss on constructive bond retirement that should be reported in the 20X3 consolidated income statement.
c. Prepare the consolidation worksheet elimination entry or entries as of December 31, 20X3, to remove the effects of the intercorporate bond ownership.