Question

Pesto Company possesses 80 percent of Salerno Company's outstanding voting stock. Pesto uses the initial value method to account for this investment. On January 1, 2017, Pesto sold 9 percent bonds payable with a $10 million face value (maturing in 20 years) on the open market at a premium of $600,000. On January 1, 2020, Salerno acquired 40 percent of these same bonds from an outside party at 96.6 percent of face value. Both companies use the straight-line method of amortization. For a 2021 consolidation, what adjustment should be made to Pesto's beginning Retained Earnings as a result of this bond acquisition?
a. $474,800 increase b. $460,800 increase c. $489,600 increase d. $467,800 increase

Answer 1

The adjustment that should be made to Pesto's beginning Retained Earnings as a result of this bond acquisition team is B. $460,800 increase

How to calculate the amount?

From the information, it was stated that Pesto Company possesses 80 percent of Salerno Company's outstanding voting stock. Pesto uses the initial value method to account for this investment. On January 1, 2017, Pesto sold 9 percent bonds payable with a $10 million face value (maturing in 20 years) on the open market at a premium of $600,000.

The book value will be:

= 18500000 + 700000

= 19200000

The Amortization will be $105000 and cash received is $7148400.

The adjustment will be:

= $489600 + $652000 + $666000 + $14800

= $460800

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