[geoschl]

Fargus Corporation owned 51% of the voting common stock of Manatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the purchase price.
On January 1, 2005, Manatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a cash, or stated, interest rate of 10% payable every December 31. Fargus acquired 40% of these bonds on January 1, 2006, at an effective interest rate of 11 percent.

Required:

(a) (20 points) What consolidation journal entry would have been recorded in connection
with these intercompany bonds on December 31, 2006?
Here is the work I did to get journals:



Decenber 31, 2006 consolidated journal entry.

Bond Payable 560000
Interest income 61600
Premium on bond 40320-4480 31360
Investment in bonds 560000
Interest Expense 51520
Extraordinary gain on 40320
retirement of bonds.

Question 2a

Book value of bonds payable
Book value, January 1, 2005 $1,512,000 $112,000 premium for 10 years = $11,200
Amortization (1 year) (11,200)
Book value, January 1, 2005 $1,500,800

Book value of 40% of bonds payable $600,320
intercompany portion



Gain on retirement of bonds Jan. 1, 2006
Purchase Price $560,000
Book value of liability, from above 600,320
Gain on retirement of bonds $40,320

Book value of bonds payable
Book value January 1, 2005 $1,500,800
Amortization for 2005 (11,200)
Book value December 31, 2005 $1,489,600
Book value of 40% if bonds payable $595,840
December 31.

Book value of investment December 31, 2006
Book value of investment, January 1, 2006
Purchase Price $560,000



Interest Expense:
Cash payment $560,000 x 10% = $56,000
Amortization of premium for 2006 (4,480)
$11,200 per year x 40% intercompany
$51,520 Inter company interest expense
Interest income:
Cash Collection $560,000 x 11% $61,600