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Question - Several years ago Abrams, Inc., sold $1,120,000 in bonds to the public. Annual cash interest of 9 percent ($100,800) was to be paid on this debt. The bonds were issued at a discount to yield 12 percent. At the beginning of 2012, Bierman Corporation (a wholly owned subsidiary of Abrams) purchased $140,000 of these bonds on the open market for $161,000, a price based on an effective interest rate of 7 percent. The bond liability had a book value on that date of $980,000. Assume Abrams uses the equity method to account internally for its investment in Bierman.
a. What consolidation entry would be required for these bonds on December 31, 2012?
b. What consolidation entry would be required for these bonds on December 31, 2014?
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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