Senior Corporation acquired 80 percent of Junior Company's voting shares on January 1, 20X8, at underlying book value. On Dec. 31, 20X8, it also purchased $500,000 par value 8 percent Junior bonds, which had been issued on January 1, 20X5 to Partner Corporation (unaffiliated with either Senior or Junior) at a $45,000 premium. The bonds were originally issued with a 12-year maturity and pay interest annually on December 31. During preparation of the consolidated financial statements for December 31, 20X8, the following consolidating entry was included in the consolidation worksheet:

-Based on the information given above,what was the carrying amount of the bonds on Junior's books on the date of purchase?

Question

Senior Corporation acquired 80 percent of Junior Company's voting shares on January 1, 20X8, at underlying book value. On Dec. 31, 20X8, it also purchased $500,000 par value 8 percent Junior bonds, which had been issued on January 1, 20X5 to Partner Corporation (unaffiliated with either Senior or Junior) at a $45,000 premium. The bonds were originally issued with a 12-year maturity and pay interest annually on December 31. During preparation of the consolidated financial statements for December 31, 20X8, the following consolidating entry was included in the consolidation worksheet:
 
-Based on the information given above,what was the carrying amount of the bonds on Junior's books on the date of purchase?

Quizplus · Accepted Answer

The carrying amount of the bonds on Junior's books on the date of purchase can be calculated as follows:
Par value of the bonds = $500,000
Premium received on issuance = $45,000
Total value of bonds at the time of issuance = $545,000
As the bonds were issued on January 1, 20X5, there would have been three years of interest expense amortized to the premium account as of the date of purchase (December 31, 20X8). With an 8% interest rate and a $545,000 bond value, the total interest expense over three years would be $130,800 ($545,000 x 8% x 3 years). Therefore, the premium amortization to the interest expense account would be $43,600 ($130,800 / 3 years).
The carrying amount of the bonds on Junior's books on the date of purchase would be:
Total value of bonds at the time of issuance - Premium amortization to interest expense account = $545,000 - $43,600 = $501,400
However, as 80% of Junior's shares are owned by Senior, the portion of the carrying amount attributable to the non-controlling interest would be 20%, or $100,280 ($501,400 x 20%). Therefore, the carrying amount of the bonds on Junior's books on the date of purchase, as reported in the consolidating entry, would be $533,769 ($433,489 + $100,280).

Senior Corporation Acquired 80 Percent of Junior Company's Voting Shares