Palmer Corporation owns 70% of the ordinary shares of Scott Corporation and uses the equity method to account for its investment. Scott purchased $80,000 par of Palmer's 10% bonds on October 1, Year 5, for $76,000. Palmer's bond liability on October 1, Year 5, consisted of $400,000 par of 10% bonds due on October 1, Year 9, with unamortized discount of $8,000. Interest payment dates are April 1 and October 1 of each year, and straight-line amortiza tion is used. Intercompany bond gains (losses) are to be allocated to each affiliate.
Both companies have a December 31 year-end. Scott's financial statements for Year 5 indicate that it earned profit of $70,000 and that on December 31, Year 5, it declared a dividend of $15,000.
(a) Prepare the journal entries under the equity method that Palmer would make in Year 5. (Assume a 40% tax rate.)
(b) Compute the amount of the bond liability that will appear on the December 31, Year 5, consolidated statement of financial position.

  • CreatedJune 08, 2015
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