Pallet Corporation owns 90% of the outstanding common stock of Stealth Company. On January 1, 2014, Stealth Company issued $500,000, 12%, ten-year bonds. On January 1, 2016, Pallet Corporation paid $412,000 for Stealth Company bonds with a par value of $400,000 and a carrying value of $393,600. Both companies use the straight-line method to amortize bond premiums and discounts. Pallet Corporation accounts for the investment using the cost method of accounting.
Pallet Corporation would report a balance in the Investment in Stealth Company Bonds account on December 31, 2016, of

Question

Quizplus · Accepted Answer

Pallet Corporation would adjust the balance in the Investment in Stealth Company Bonds account for the amortization of the discount over the period from the purchase date to December 31, 2016. Since the bonds were purchased at $412,000, which is above the carrying value of $393,600, this indicates a discount that needs to be amortized. Using the straight-line method over the remaining life of the bonds, the amortization for one year would reduce the discount, thus increasing the carrying amount of the investment. The exact amount of amortization depends on the specifics of the bond and the amortization schedule, but given the options provided, the closest and most logical adjustment from the purchase price would be to an amount that reflects some amortization of the discount, making $410,500 the correct choice.

Pallet Corporation Owns 90% of the Outstanding Common Stock of Stealth