Question

Stang Corporation issued to Bradley Company $400,000 par value, 10-year bonds with a coupon rate of 12 percent on January 1, 2005, at 105. The bonds pay interest semiannually on July 1 and January 1. On January 1, 2010, Purple Corporation purchased $100,000 of the bonds from Bradley for $104,900. Purple owns 65 percent of the voting common shares of Stang and prepares consolidated financial statements.

a. Prepare the worksheet elimination entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements for 2010.
Show and label calculations for the following accounts:
Premium on Bonds Payable
Investment in Stang Corporation Bonds
Interest Income
Interest Expense
Investment in Stang Corporation
NCI in NA of Stang Corporation

Answer 1

To eliminate the effects of intercorporate bond ownership, an elimination entry is needed in preparing consolidated financial statements for 2010.

Step-by-step explanation:

In preparing consolidated financial statements for 2010, an elimination entry is needed to remove the effects of the intercorporate bond ownership. This entry will eliminate the premium on bonds payable, the investment in Stang Corporation bonds, interest income, interest expense, investment in Stang Corporation, and NCI in NA of Stang Corporation.

To eliminate the premium on bonds payable, you would debit Premium on Bonds Payable and credit Investment in Stang Corporation Bonds. For the interest income and expense accounts, you would debit or credit Interest Income and Interest Expense accordingly. Finally, to eliminate the investment in Stang Corporation and NCI in NA of Stang Corporation, you would debit Investment in Stang Corporation and credit NCI in NA of Stang Corporation.