On January 1, 20X3, Pope Company acquired 100% of the common stock of Siegel Company for $300,000. On this date Siegel had total owners' equity of $250,000. Any excess of cost over book value is attributable to goodwill. Pope accounts for its investment in Siegel using the simple equity method.
Also on July 1, 20X3, Siegel Company sold to outside investors $200,000 par value of 10-year, 10% bonds. The price received was equal to par. The bonds pay interest semi-annually on July 1 and January 1.
During early 20X4, market interest rates on bonds similar to those issued by Siegel decreased to 8%. As a result, the market value of the bonds increased. On July 1, 20X4, Pope purchased $100,000 par value of Siegel's bonds, paying $112,695. Pope still holds the bonds on December 31, 20X4 and has amortized the premium, using the effective-interest method which has resulted in interest income of $4,508 and a balance in the Investment in Subsidiary Bonds account of $112,203.
Required:
Prepare the eliminating entries pertaining to the intercompany purchase of the bonds for the year ended December 31, 20X4.
|
(B1)
|
Interest payable
|
|
|
|
Interest receivable
|
|
|
|
Eliminate $5,000 ($100,000 x 10% / 2) of intercompany interest receivable and payable. (payment date January 1)
|
|
|
|
|
|
|
|
(B2)
|
Interest income - Parent
|
|
|
|
Interest expense - Subsidiary
|
|
|
|
Eliminate all of the intercompany interest income and one-half of the interest expense for the last one-half of the year.
|
|
|
|
|
|
|
|
Bonds payable - Subsidiary
|
|
|
|
Investment in Subsidiary bonds
|
|
|
|
Eliminate the balance in investment in bonds against one-half of the bonds payable.
|
|
|
|
|
|
|
|
Loss on retirement of bonds
|
|
|
|
The resulting loss is $12,695 ($112,695 purchase price of bonds less $100,000 carrying value).
|
|
|
MSC: effective-interest amortization; consolidation in year bonds are purchased