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Pesto Company posesses 80 percent of Salerno Company's outstanding voting stock. Pesto uses the initial value...

Pesto Company posesses 80 percent of Salerno Company's outstanding voting stock. Pesto uses the initial value method to account for this investment. On January 1, 2014, Pesto sold 9 percent bonds payable with a 10 million dollar face value (maturing in 20 years) on the open market at a premium of 600,000. On January 1 2017, Salerno acquired 40 percent of these same bonds from an outside party at 96.6 percent of face value. Both companies use the straight line method of amortization. For 2018 consolidation what adjustment should be made to Pesto's beginning Retained earnings as a result of this bond acquisition? Please show step by step calculations

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Calculation of Value (10,000,000+600,000)                                           10,600,000.00
Amortization value (600,000/20 Years*3 Years)                                                    90,000.00
Net Book Value                                           10,510,000.00
Reacquirement of bonds 40%
Book Value of Retired bonds                                              4,204,000.00
Cash Received (($10,000,000 * 40%)* 96.6%)                                              3,864,000.00
Gain on retirement of bonds (A)                                                 340,000.00
Cash Interest Expense ($4,000,000 * 9%)                                                 360,000.00
Premium Amortization ($600,000/20 years’ life * 40%)                                                    12,000.00
Interest Expense (B)                                                 348,000.00
Discount Amortization = ($10,000,000 * 40%/20 years – 3 years * (100 – 96.6)) $                                                  8,000.00
(C) 368000
Adjustment Required (A)+ (B)-.(C)                                                 320,000.00

ekkarill92 answered 8 months ago
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