Exercise 9-5

On January 2, 2014, Peoples, Inc. acquired an 80% interest in Schmidt Corporation for $1,080,000. Schmidt reported total stockholders equity of $1,200,000 on this date. An examination of Schmidts books revealed that book value was equal to fair value for all assets and liabilities except for inventory, which was undervalued by $59,400. All of the undervalued inventory was sold during 2014. Peoples also purchased 30% of the $400,000 par value outstanding bonds of Schmidt Corporation for $112,000 on January 2, 2014. The bonds mature in 10 years, carry an 10% annual interest rate payable on June 30 and December 31, and had a carrying value of $404,000 on the date of purchase. Both companies use the straightline method to amortize bond discounts and premiums. Peoples reported net income of $295,000 for 2014 and paid dividends of $132,000 during 2014. Schmidt Corporation reported net income of $341,000 for 2011 and paid dividends of $88,000 during the year. Compute the following items at December 31, 2014:

1. Carrying value of the debt. Carrying value of debt - 12/31/2014 $ = ?

2. Interest revenue reported by Peoples, Inc. Interest revenue $ =?

3. Interest expense reported by Schmidt Corporation Interest expense $ =?

4. Balance in the Investment in Schmidt Bonds account. Investment account balance - 12/31/2014 $ = ?

5. Controlling interest in consolidated net income for 2014 using the t-account approach. Controlling interest in consolidated net income $ = ?

6. Noncontrolling interest in consolidated income for 2014. Noncontrolling interest in consolidated income $ =?

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