Reference no: EM133266702
Problem:
On January 1, 20X4, Parent Company purchased 90% of the common stock of Subsidiary Company for $360,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $20,000, $130,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent account for the Investment in Subsidiary using the simple equity method.
On July 1, 20X4, Subsidiary sold $100,000 par value of 9%, ten-year bonds for $106,755, which resulted in an effective interest rate of 8%. The bonds pay interest semi-annually on January 1 and July 1 of each year. Subsidiary uses the effective-interest method of amortizing the premium.
An amortization table for 20X4 and 20X5 is presented below:
|
Date
|
Cash Int
|
Interest Exp
|
Premium Amort
|
Premium Bal
|
Carrying Value
|
|
7/1/X4
|
|
|
|
6,755
|
106,755
|
|
12/31/X4
|
4,500
|
4,270
|
230
|
6,525
|
106,525
|
|
7/1/X5
|
4,500
|
4,261
|
239
|
6,286
|
106,286
|
|
12/31/X5
|
4,500
|
4,251
|
249
|
6,037
|
106,037
|
On July 1, 20X5, Parent repurchased all of Par's bonds for $94,153, which resulted in an effective interest rate of 10%. The bonds are still held at year end.
Both companies have correctly recorded all entries relative to bonds and interest. The balance in the Investment in Subsidiary Bonds account is $94,361 at December 31, 20X5, and the parent recognized interest income of $4,708 during the period.
Prepare the eliminating entries pertaining to the intercompany purchase of bonds for the year ending December 31, 20X5.
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