Pesto Company possesses 80 percent of Salerno Company s outstanding voting
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, 2010, 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, 2013, 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 2014 consolidation, what adjustment should be made to Pesto’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.

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