On January 1 20X1 Phaser Corporation issued to the public 10

On January 1, 20X1, Phaser Corporation issued to the public $1,000,000 face amount of 9%, 10-year bonds maturing December 31,2X10, for $1,100,000 (at a premium with a yield of 8 percent). The premium is amortized using the interest method and interest is paid on December 31 of each year.

On January 1, 20X2, Sedd Company, the 70% owned subsidiary of Phaser, acquired in the open market all of the Phaser bonds for $990,000 (at a discount with a yield of 10 percent). The discount is amortized using the interest method.

Compute the interest expense on the Phaser bonds payable for years 20X1 and 20X2.

Compute the interest revenue for Sedd for for 20X2.

Prepare the elimination entry needed at December 31, 20X2.

Solution

Interest expenses:

for 20X1= previous book value*market intrerest rate

= 1100000*8/100 = 88000

for 20X2= previous book value*market interest rate

(1100000-2000)*8/100 =87840

here 2000$ is the amortisation of bond premium = (1000000*9/100)-88000

=2000$

b)Interest revenue for Sedd:

interest revenue=1000000*9/100=90000$

Loss on purchase= book value of bonds-purchase price

1095840-990000 =105840

Amortisation of loss=105840/(10-2) =13230

Actual interest revenue after amortisation= 90000-13230=76770$

here book value is calculated as follows:1098000-2160(90000-87840)

c) if interest is not paid then elimination entry will be:

Interest payable 90000

interest receivable 90000

interest revenue = 87667*70/100 =61367$ because this interest they need not to pay to outsider