Peanut Corporation acquired 80 percent of Snoopy Company's voting shares on January 1,20X8,at underlying book value.On that date,it also purchased $500,000 par value 8 percent Snoopy bonds,which had been issued on January 1,20X5,with a 12-year maturity.During preparation of the consolidated financial statements for December 31,20X8,the following consolidating entry was made in the worksheet:

-Based on the information given above,what was the carrying amount of the bonds on Snoopy's books on the date of purchase?
A)$533,750
B)$516,875
C)$545,000
D)$550,625

Question

Peanut Corporation acquired 80 percent of Snoopy Company's voting shares on January 1,20X8,at underlying book value.On that date,it also purchased $500,000 par value 8 percent Snoopy bonds,which had been issued on January 1,20X5,with a 12-year maturity.During preparation of the consolidated financial statements for December 31,20X8,the following consolidating entry was made in the worksheet:
 
-Based on the information given above,what was the carrying amount of the bonds on Snoopy's books on the date of purchase?
A)$533,750 
B)$516,875 
C)$545,000 
D)$550,625

Quizplus · Accepted Answer

Since the bonds were issued on January 1, 20X5, they would have been outstanding for three years by January 1, 20X8, the date Peanut Corporation purchased them. Therefore, the carrying amount of the bonds on Snoopy's books would have been their face value ($500,000) plus accumulated amortization over the three years. Assuming straight-line amortization, the annual amortization would have been $40,000 ($500,000/12.5), and the accumulated amortization over three years would have been $120,000 ($40,000 x 3). The carrying value of the bonds on Snoopy's books would therefore be $620,000 ($500,000 + $120,000), and 80% of that would be $496,000. However, the question asks for the carrying amount on the date of purchase, not on Snoopy's books, so we need to add in the premium of $37,750 (the bonds were purchased for $537,750, which is $37,750 more than their face value of $500,000). Therefore, the carrying amount of the bonds on Snoopy's books on the date of purchase was $533,750 ($496,000 + $37,750).

Peanut Corporation Acquired 80 Percent of Snoopy Company's Voting Shares