Parker Company owns 90% of the outstanding common stock of Stagger Company. On January 1, 2014, Stagger Company issued $500,000, 12%, ten-year bonds. On January 1, 2016, Parker Company paid $315,000 for Stagger Company bonds with a par value of $300,000 and a carrying value of $297,600. Both companies use the straight-line method to amortize bond premiums and discounts. Parker Company accounts for the investment using the cost method of accounting.
Parker Company would report a balance in the Investment in Stagger Company Bonds account on December 31, 2016, of:

Question

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Parker Company would report a balance of $313,125 in the Investment in Stagger Company Bonds account on December 31, 2016. This is because under the cost method, the initial investment is recorded at cost ($315,000), and then interest is accrued. Given the bonds were purchased at a premium ($315,000 for bonds with a par value of $300,000), the premium of $15,000 is amortized over the remaining life of the bond. Since the bonds were 10-year bonds issued in 2014 and purchased by Parker in 2016, there are 8 years left. The annual amortization is $15,000 / 8 = $1,875. For one year, this reduces the investment account by $1,875, resulting in a balance of $313,125 ($315,000 - $1,875).

Parker Company Owns 90% of the Outstanding Common Stock of Stagger