Fargus Corporation owned 51% of the voting common stock of Manatee, Inc. The par
ID: 2453249 • Letter: F
Question
Fargus Corporation owned 51% of the voting common stock of Manatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the purchase price. On January 1, 2005, Manatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a cash, or stated, interest rate of 10% payable every December 31. Fargus acquired 40% of these bonds on January 1, 2006, at an effective interest rate of 11 percent. Required: (a) (20 points) What consolidation journal entry would have been recorded in connection with these intercompany bonds on December 31, 2006?
Explanation / Answer
In the books of Manatee
1 Jan Cash a/c Dr ($14,00,000/100=14000*108) 1512000
Bond Pay 1400000
Premium 112000
(Being cash received for 14000 units @108 per bond)
31 Dec Interest Expenses a/c Dr 129800
Premium a/c Dr 11200
To Interest payable 140000
10 year is life so premium will be amortized @ $11200 (112000/10) and the Interest exp will be ($140000-11200)= $129800
31 Jan 2006
Interest Expenses a/c Dr 129800
Premium a/c Dr 11200
To Interest payable 140000
In the books of Fargus
1 Jan Bond Investment a/c Dr 504505
To cash 504505
Present Value of Investment on 1.1.2006 (1400000*.4)/1.11(effective Interest rate)= 560000/1/11=$504505
31 Dec Interest Received a/c Dr 140000
Bond Investment 7928
To Interest receivable 147928
Diffrence of par value minus purchase value 560000-504505=$55495 divided in 7 years= 7928
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