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

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Accounting

Pesto Company posesses 80 percent of Salerno Company'soutstanding voting stock. Pesto uses the initial value method toaccount for this investment. On January 1, 2014, Pesto sold 9percent bonds payable with a 10 million dollar face value (maturingin 20 years) on the open market at a premium of 600,000. On January1 2017, Salerno acquired 40 percent of these same bonds from anoutside party at 96.6 percent of face value. Both companies use thestraight line method of amortization. For 2018 consolidation whatadjustment should be made to Pesto's beginning Retained earnings asa result of this bond acquisition? Please show step by stepcalculations

Answer & Explanation Solved by verified expert
4.4 Ratings (974 Votes)

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

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