Franklin Corporation owns 90 percent of the outstanding voting stock of Georgia Company. On January 2, 2011, Georgia sold 7 percent bonds payable with a $5,000,000 face value maturing January 2, 2031 at a premium of $500,000. On January 1, 2013, Franklin acquired 20 percent of these same bonds on the open market at 97.66. Both companies use the straight-line method of amortization. What adjustment should be made to Franklin's 2014 beginning Retained Earnings as a result of this bond acquisition?
A) $107,100.
B) $113,400.
C) $119,700.
D) $144,000.
E) $152,000.

Question

Quizplus · Accepted Answer

Franklin acquired 20% of the bonds, which is $1,000,000 face value. The premium on the bonds was $500,000, so the total carrying value of the bonds was $5,500,000. Franklin paid 97.66% of the face value, which is $976,600. The difference between the carrying value of the bonds acquired ($1,100,000) and the purchase price ($976,600) is $123,400. The amortization of the premium over the two years (2013 and 2014) using the straight-line method is $16,300 per year, totaling $32,600. Therefore, the adjustment to Franklin's 2014 beginning Retained Earnings is $123,400 - $32,600 = $107,100.

Franklin Corporation Owns 90 Percent of the Outstanding Voting Stock