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5 December, 02:51

On January 1, 2016, Pope Company acquired 100% of the common stock of Siegel Company for $300,000. On this date Siegel had total owners' equity of $250,000. Any excess of cost over book value is attributable to goodwill. Pope accounts for its Investment in Siegel using the simple equity method. On January 1, 2016, Siegel Company sold to outside investors $300,000 par value of 10-year, 10% bonds. The price received was equal to par. The bonds pay interest semi-annually on July 1 and January 1. During 2016, market interest rates on bonds similar to those issued by Siegel decreased to 8%. As a result, the market value of the bonds increased. On December 31, 2016, Pope purchased $150,000 par value of Siegel's bonds, paying $163,000. Pope still holds the bonds on December 31, 2019 and has amortized the premium, using the straight-line method. Required: Prepare the eliminating entries pertaining to the intercompany purchase of bonds outstanding for the year ended December 31, 2019.

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  1. 5 December, 06:26
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    Eliminations and Adjustments:

    (1) Interest Payable Dr $7,500

    To Interest receivable $7,500

    (Eliminate $7,500 ($150,000 * 10%/2) of intercompany interest receivable and payable)

    (2) Interest income - Parent Dr $13,556

    Bonds-payable subsidiary Dr $150,000

    Retained Earnings. Dr $13,000

    To Interest expense - Subsidiary $15,000

    To Investment in Subsidiary bonds $161,556

    (Eliminating interest and balance in investment bonds)

    Annual adjustment to interest = $13,000/9 = $1,444

    Interest income - Parent = $15,000 - $1,444 = $13,556

    Investment in Subsidiary bonds = $163,000 - $1,444 = $161,556

    Retained earnings = Purchase price of bonds less carrying value = $163,000 - $150,000 = $13,000
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