Question

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 bond acquisition?

Answer is $107,100. PLEASE SHOW YOUR WORK TO EXPLAIN WHY!!

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Answer #1

Solution:-

What adjustment should be made to Franklin's 2012 beginning Retained Earnings as a result of this bond acquisition?

Particular Amount
Bonds payable

= 5,000,000 * 20% * 90%

= 5,000,000 * 0.20 *0.90

= $900,000
Bond premium

= [ 500,000 * 10% ]* 20% * 3

= 50,000 * 0.20 * 3

= $30,000
Retained earnings $ 37160
Bond investment

= [ 5,000,000 + 500,000] * 20% * 97.66%

= 5,500,000 * 0.20 *97.66%

= $1,074,260
Beginning Retained Earnings

= $1,074,260 - [ $900,000 + $30,000 +  37,160 ]

= $1,074,260 - 967,160

= $107,100
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