Able Company possesses 80 percent of Baker Companys outstanding voting stock. Able uses the partial equity method

Question:

Able Company possesses 80 percent of Baker Company’s outstanding voting stock. Able uses the partial equity method to account for this investment. On January 1, 2007, Able 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, 2010, Baker acquired 40 percent of these same bonds from an outside party at 96.6 of face value. Both companies use the straight-line method of amortization. For a 2011 consolidation, what adjustment should be made to Able’s beginning Retained Earnings as a result of this bond acquisition?

a. $320,000 increase.

b. $326,000 increase.

c. $331,000 increase.

d. $340,000 increase.

Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...