Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The par
ID: 2585789 • Letter: F
Question
Fargus Corporation owned 51% of the voting common stock of Sanatee, 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 acquisition price.
On January 1, 2017, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2019, for 95% of the face value. Both companies utilized the straight-line method of amortization.
What balances would need to be considered in order to prepare the consolidation entry in connection with these intra-entity bonds at December 31, 2019, the end of the first year of the intra-entity investment? Prepare schedules to show numerical answers for balances that would be needed for the entry.( Face value = 560,000)
What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2019?
Explanation / Answer
SOLUTION:
BV of bonds payable, January 1,2019
Book value, January 1, 2019
1,512,000
Amortization — 2017-18 (112,000 premium / 10 years * 2 years)
-22,400
BV of bonds payable, January 1,2019
1,489,600
BV of 40% of bonds payable (intercompany portion), 2019
595,840
Gain on retirement of bonds, January 1, 2019
Purchase price ($560,000 * 95%)
532,000
BV of liability
595,840
Gain on retirement of bonds, January 1, 2019
63,840
BV of bonds payable, December 31,2019
BV, January 1, 2019
1,489,600
Amortization
-11,200
BV of bonds payable, December 31, 2019
1,478,400
BV of 40% of bonds payable (intercompany portion), Dec 31 2019
591,360
BV of investment, December 31, 2019
BV of investment, December 31, 2019
532,000
Amortization - 2019 (28000/8 Years)
-3,500
BV of bonds payable, December 31, 2019
535,500
Intercompany interest balances for 2019
Cash payment ($560,000 * 10%)
56,000
Amortization of premium for 2019 ($11,200 * 10%)
-4,480
Intercompany interest expense
51,520
Cash collection ($560,000 * 40%)
56,000
Amortization of discount for 2019
3,500
Intercompany interest income
59,500
Particulars
Debit
Credit
Dr. Bonds Payable
560,000
Dr. Premium on Bonds Payable
31,360
Dr. Interest Income
59,500
Cr. Investment in Bonds
535,500
Cr. Interest Expense
51,520
Cr. Extraordinary Gain on Early Extinguishment of Debt
63,840
BV of bonds payable, January 1,2019
Book value, January 1, 2019
1,512,000
Amortization — 2017-18 (112,000 premium / 10 years * 2 years)
-22,400
BV of bonds payable, January 1,2019
1,489,600
BV of 40% of bonds payable (intercompany portion), 2019
595,840
Gain on retirement of bonds, January 1, 2019
Purchase price ($560,000 * 95%)
532,000
BV of liability
595,840
Gain on retirement of bonds, January 1, 2019
63,840
BV of bonds payable, December 31,2019
BV, January 1, 2019
1,489,600
Amortization
-11,200
BV of bonds payable, December 31, 2019
1,478,400
BV of 40% of bonds payable (intercompany portion), Dec 31 2019
591,360
BV of investment, December 31, 2019
BV of investment, December 31, 2019
532,000
Amortization - 2019 (28000/8 Years)
-3,500
BV of bonds payable, December 31, 2019
535,500
Intercompany interest balances for 2019
Cash payment ($560,000 * 10%)
56,000
Amortization of premium for 2019 ($11,200 * 10%)
-4,480
Intercompany interest expense
51,520
Cash collection ($560,000 * 40%)
56,000
Amortization of discount for 2019
3,500
Intercompany interest income
59,500
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