Question

Pesto Company possesses 80 percent of Salerno Company's outstanding voting stock. Pesto uses the initial value...

Pesto Company possesses 80 percent of Salerno Company's outstanding voting stock. Pesto uses the initial value method to account for this investment. On January 1, 2014, Pesto sold 9 percent bonds payable with a $8.0 million face value (maturing in 20 years) on the open market at a premium of $1,020,000. On January 1, 2017, Salerno acquired 40 percent of these same bonds from an outside party at 96.6 percent of face value. Both companies use the straight-line method of amortization. For a 2018 consolidation, what adjustment should be made to Pesto's beginning Retained Earnings as a result of this bond acquisition?

  • $439,000 increase

  • $449,200 increase

  • $455,600 increase

  • $428,800 increase

Business   Accounting   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Answer - (b) $449,200

Explanation

Book Value = 8,000,000 + 1,020,000 = 9,020,000

Amortization = 1,020,000/20 x 3 = 153,000

Cash Received = 9,000,000 x 40% x 96.6%

= 3,091,200

Book Value = 9,020,000 - 153,000 = 8,867,000

Book Value of Retired Bonds = 3,546,800 (40% of 8867000)

Cash Received = 3,091,200

Gain on Retirement of bonds = 455,600

Cash Interest Expense = 8,000,000 x 40% x 9% = 288,000

Premium Amortization = 1,020,000/20 x 40% = 20,400

Interest Expense = 288,000 - 20,400 = 267,600

Discount amortization = 8,000,000 x 40%/ (20yrs - 3 Yrs) x (100% - 96.6%)

= 6,400

Interest income =267,600 + 6400 = 274,000

Adjustment = 455,600 + 267,600 - 274,000

= 449,200

So Increase is B. 449,200 Increase

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Pesto Company possesses 80 percent of Salerno Company's outstanding voting stock. Pesto uses the initial value...
Pesto Company possesses 80 percent of Salerno Company's outstanding voting stock. Pesto uses the initial value method to account for this investment. On January 1, 2014, Pesto sold 6 percent bonds payable with a $14.0 million face value (maturing in 20 years) on the open market at a premium of $1,070,000. On January 1, 2017, Salerno acquired 40 percent of these same bonds from an outside party at 96.6 percent of face value. Both companies use the straight-line method of...
13. Pesto Company possesses 80 percent of Salerno Company's outstanding voting stock. Pesto uses the initial...
13. Pesto Company possesses 80 percent of Salerno Company's outstanding voting stock. Pesto uses the initial value method to account for this investment. On January 1, 2017, Pesto sold 11 percent bonds payable with a $10.4 million face value (maturing in 20 years) on the open market at a premium of $830,000. On January 1, 2020, Salerno acquired 40 percent of these same bonds from an outside party at 96.6 percent of face value. Both companies use the straight-line method...
81. Franklin Corporation owns 90 percent of the outstanding voting stock of Georgia Company. On January...
81. Franklin Corporation owns 90 percent of the outstanding voting stock of Georgia Company. On January 2, 2009, Georgia sold 7 percent bonds payable with a $5,000,000 face value maturing January 2, 2029 at a premium of $500,000. On January 1, 2011, Franklin acquired 20 percent of these same bonds on the open market at 97.66. Both companies use the straight-line method of amortization. What adjustment should be made to Franklin's 2012 beginning Retained Earnings as a result of this...
Cairns owns 75 percent of the voting stock of Hamilton, Inc. The parent’s interest was acquired...
Cairns owns 75 percent of the voting stock of Hamilton, 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. Cairns uses the equity method in its internal records to account for its investment in Hamilton. On January 1, 2011, Hamilton sold $1,200,000 in 10-year bonds to the public at 105. The bonds had a cash interest rate of 7...
Assume that a parent company owns 80 percent of its subsidiary. The parent company uses the...
Assume that a parent company owns 80 percent of its subsidiary. The parent company uses the equity method to account for its investment in subsidiary. On January 1, 2012, the parent company issued to an unaffiliated company $1,000,000 (face value) 10 year, 10 percent bond payable for a $61,000 premium. The bonds pay interest in December 31 of each year. On January 1, 2015, the subsidiary acquired 40 percent of the bonds for $386,000. Both companies use straight-line amortization. In...
Assume that a parent company owns 80 percent of its subsidiary. The parent company uses the...
Assume that a parent company owns 80 percent of its subsidiary. The parent company uses the equity method to account for its investment in subsidiary. On January 1, 2012, the parent company issued to an unaffiliated company $1,000,000 (face value) 10 year, 10 percent bond payable for a $61,000 premium. The bonds pay interest in December 31 of each year. On January 1, 2015, the subsidiary acquired 40 percent of the bonds for $386,000. Both companies use straight-line amortization. In...
Cairns owns 70 percent of the voting stock of Hamilton, Inc. The parent’s interest was acquired...
Cairns owns 70 percent of the voting stock of Hamilton, 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. Cairns uses the equity method in its internal records to account for its investment in Hamilton. On January 1, 2014, Hamilton sold $1,100,000 in 10-year bonds to the public at 110. The bonds had a cash interest rate of 8...
On January 1, 2017, Doone Corporation acquired 80 percent of the outstanding voting stock of Rockne...
On January 1, 2017, Doone Corporation acquired 80 percent of the outstanding voting stock of Rockne Company for $784,000 consideration. At the acquisition date, the fair value of the 20 percent noncontrolling interest was $196,000 and Rockne's assets and liabilities had a collective net fair value of $980,000. Doone uses the equity method in its internal records to account for its investment in Rockne. Rockne reports net income of $380,000 in 2018. Since being acquired, Rockne has regularly supplied inventory...
On January 1, 2017, QuickPort Company acquired 90 percent of the outstanding voting stock of NetSpeed,...
On January 1, 2017, QuickPort Company acquired 90 percent of the outstanding voting stock of NetSpeed, Inc., for $972,000 in cash and stock options. At the acquisition date, NetSpeed had common stock of $1,020,000 and Retained Earnings of $51,000. The acquisition-date fair value of the 10 percent noncontrolling interest was $108,000. QuickPort attributed the $9,000 excess of NetSpeed's fair value over book value to a database with a five-year remaining life. During the next two years, NetSpeed reported the following:...
On January 1, 2012, Aspen Company acquired 80 percent of Birch Company’s outstanding voting stock for...
On January 1, 2012, Aspen Company acquired 80 percent of Birch Company’s outstanding voting stock for $392,000. Birch reported a $355,000 book value and the fair value of the noncontrolling interest was $98,000 on that date. Also, on January 1, 2013, Birch acquired 80 percent of Cedar Company for $228,000 when Cedar had a $204,000 book value and the 20 percent noncontrolling interest was valued at $57,000. In each acquisition, the subsidiary’s excess acquisition-date fair over book value was assigned...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT