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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 preparing the consolidated financial statements for the year ended December 31, 2016, what is the consolidation entry adjustment?

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Answer #1
Journal
Date Particulars Debit Credit
2016 $ $
Dec-31 10% Bonds A/c   (1000000*0.40*0.80) 320000
Premium on redemption of BondsA/c (61000*0.40*0.80) 19520
                          To Investment in Bonds A/c 308800 (386000*0.80)
                          To Capital reserve A/c 30720 (Balancing Figure)
(Being consolidation entry for Bonds made)
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