Problem $7-12$

L$05,7$

Palmer Corporation owns $70\%$ of the ordinary shares of Scott Corporation and uses the equity method to account for its investment.

Scott purchased $$80,000$ par of Palmer's $10\%$ bonds from outsiders on October $1,$ Year $5,$ for $$72,000.$ Palmer's bond liability on October $1,$ Year $5,$ consisted of $$400,000$ par of $10\%$ bonds due on October $1,$ Year $9,$ with unamortized discount of $$16,000.$ Interest payment dates are April $1$ and October $1$ of each year, and straight$-$line amortization 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 $$60,000$ and that on December $31,$ Year $5,$ it declared a dividend of $$13,000.$

Required

$($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.