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direct sale of bonds to parent effective interest method on january 1 20×1 fern corp 733572

Direct Sale of Bonds to Parent (Effective Interest Method)

On January 1, 20X1, Fern Corporation paid Morton Advertising $116,200 to acquire 70 percent of Vincent Company’s stock. Fern also paid $45,000 to acquire $50,000 par value 8 percent, 10 year bonds directly from Vincent on that date. This purchase represented ½ of the bonds that were originally issued. Interest payments are made on January 1 and July 1. The fair value of the noncontrolling interest at January 1, 20X1, was $49,800, and book value of Vincent’s net assets was $110,000. The book values and fair values of Vincent’s assets and liabilities were equal except for buildings and equipment, which had a fair value $56,000 higher than book value and a remaining economic life of 14 years at January 1, 20X1.

The trial balances for the two companies as of December 31, 20X3, are as follows:

Fern Corporation

Vincent Company

Item

Debit

Credit

Debit

Credit

Cash & Current Receivables

$ 30,300

$ 46,000

Inventory

170,000

70,000

Land, Buildings, & Equipment (net)

320,000

180,000

Investment in Vincent Bonds

46,046

Investment in Vincent Stock

144,835

Discount on Bonds Payable

7,908

Operating Expenses

198,500

161,000

Interest Expense

27,000

8,764

Dividends Declared

60,000

10,000

Current Liabilities

$ 35,000

$ 33,000

Bonds Payable

300,000

100,000

Common Stock

100,000

50,000

Retained Earnings

238,934

100,672

Sales

300,000

200,000

Interest Income

4,382

Income from Subsidiary

18,365

Total

$996,681

$996,681

$483,672

$483,672

On July 1, 20X2, Vincent sold land that it had purchased for $17,000 to Fern for $25,000. Fern continues to hold the land at December 31, 20X3. Assume Fern Corporation uses the fully adjusted equity method.

Required

a. Record the journal entries for 20X3 on Fern’s books related to its investment in Vincent’s stock and bonds.

b. Record the entries for 20X3 on Vincent’s books related to its bond issue.

c. Prepare elimination entries needed to complete a consolidation worksheet for 20X3.

d. Prepare a three part consolidation worksheet for 20X3.

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