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Aaron Company's books show current earnings of $491,000 and $30,000 in cash dividends. Zeese Company earns...

Aaron Company's books show current earnings of $491,000 and $30,000 in cash dividends. Zeese Company earns $120,000 in net income and declares $7,500 in dividends. Aaron has held a 70 percent interest in Zeese for several years, an investment with an acquisition-date excess fair over book value attributable solely to goodwill. Aaron uses the initial value method to account for these shares and includes dividend income in its internal earnings reports.

On January 1 of the current year, Zeese acquired in the open market $66,600 of Aaron’s 8 percent bonds. The bonds had originally been issued several years ago at 92, reflecting a 10 percent effective interest rate. On the date of purchase, the carrying amount of the bonds payable was $62,700. Zeese paid $58,800 based on a 12 percent effective interest rate over the remaining life of the bonds.

What is consolidated net income for this year?

Multiple Choice

  • $610,436.

  • $496,250.

  • $608,864.

  • $615,686.

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Answer:

Aaron's Net Income $491,000.00
Less:Intra-entity dividends (initial value method);$7,500 x 70% -$5,250.00 $485,750.00
Zeese reported Income $120,000.00
Gain on extinguishment of debt ($62,700-$58,800) $3,900.00
Eliminate interest expense on "retired" debt ($62,700 × 10%) $6,270.00
Eliminate interest income on "retired" debt ($58,800 × 12%) -$7,056.00
Consolidated net income $608,864.00

Option C

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