Fargus Corporation owned 51% of the voting common stock of Sanatee, 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 purchase price.
On January 1, 2006, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a cash interest rate of 10% payable every December 31. Fargus acquired 40% of these bonds on January 1, 2008, for 95% of the face value. Both companies utilized the straight-line method of amortization.
Required:
1. What balances would need to be considered in order to prepare the consolidation entry in connection with these intercompany bonds at December 31, 2008, the end of the first year of the intercompany investment?
Prepare schedules to show numerical answers for balances that would be needed for the entry.
2. What consolidation entry would have been recorded in connection with these intercompany bonds on December 31, 2008?