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Question: Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest wa...

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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 acquisition price. On January 1, 2010, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31 and were sold to yield 8.76624%.Fargus acquired 40% of these bonds on January 1, 2012, for 95% of the face value. Based upon this purchase price, Fargus will receive a 10.9706% return on its investment. Both companies utilized the effective interest method of amortization.Fargus accounts for its investment in Sanatee using the initial value method.

REQUIRED: (1) In good form, prepare amortization schedules through December 31, 2015 for both the parent and subsidiary, rounding all figures to the nearest dollar. ** HAVE TO USE EFFECTIVE INTEREST METHOD OF AMORTIZATION NOT STRAIGHT LINE

(2)In good form, prepare the consolidation elimination entries needed in connection with these intra-entity bonds at December 31, 2012.

(3)In good form, prepare the consolidation elimination entries needed in connection with these intra-entity bonds at December 31, 2015. * this is all the info that is given

Answer 1

In the books of Sanatee Ltd.

A	B	C	D	E	F	G
Year	Interest payment stated 10%* FV	Interest expense YTM 8.76624%X BV in G	Amortisation of Bond premium C-B	Balance in premium account	Balance in bond payabe	Book value of Bond E+F
				112000	1400000	1512000
1	140000	132545.5488	-7454.4512	104545.5	1400000	1504546
2	140000	131892.0737	-8107.9263	96437.62	1400000	1496438
3	140000	131181.3134	-8818.6866	87618.94	1400000	1487619
4	140000	130408.2462	-9591.7538	78027.18	1400000	1478027
5	140000	129567.4101	-10432.59	67594.59	1400000	1467595
6	140000	128652.8642	-11347.136	56247.46	1400000	1456247
7	140000	127658.147	-12341.853	43905.6	1400000	1443906
8	140000	126576.2306	-13423.769	30481.83	1400000	1430482
9	140000	125399.4707	-14600.529	15881.3	1400000	1415881
10	140000	124119.5533	-15880.447	0.858008	1400000	1400001

Premium amount
Bond Face Value		1400000
Premium value		1.08
Bond Value		1512000
Premium amount		112000

In the books of Fargus

A	B	C	D	E	F	G
Year	Interest payment stated 10%* FV	Interest expense YTM 10.9706%X BV in G	Amortisation of Discount B-C	Balance in discount account	Balance in bond payabe	Book value of Bond F-E
				28000	560000	532000
1	56000	58363.592	-2363.592	25636.41	560000	534363.6
2	56000	58622.89222	-2622.8922	23013.52	560000	536986.5
3	56000	58910.63924	-2910.6392	20102.88	560000	539897.1
4	56000	59229.95383	-3229.9538	16872.92	560000	543127.1
5	56000	59584.29914	-3584.2991	13288.62	560000	546711.4
6	56000	59977.51826	-3977.5183	9311.105	560000	550688.9
7	56000	60413.87588	-4413.8759	4897.229	560000	555102.8
8	56000	60898.10455	-4898.1045	-0.87512	560000	560000.9

Bond acquired		40% X 95% X 1400000		532000
Face value of bond		40% X 1400000		560000
		Discount received		28000

2012 intra company entry

Bonds Payable.....................................Dr 532000

Discount received..................................Dr 28000

To Bank 560000

(Being elimination of intra companies entry)

2015 intra company entry

Interest payable...................................Dr 56000

To Interest expense 56000

(Elimination of interest )