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Purse Corporation owns 70 percent of Scarf Company’s voting shares. On January 1, 20X3, Scarf sold...

Purse Corporation owns 70 percent of Scarf Company’s voting shares. On January 1, 20X3, Scarf sold bonds with a par value of $705,000 at 98. Purse purchased $470,000 par value of the bonds; the remainder was sold to nonaffiliates. The bonds mature in five years and pay an annual interest rate of 8 percent. Interest is paid semiannually on January 1 and July 1.

Required: a. What amount of interest expense should be reported in the 20X4 consolidated income statement? (Do not round your intermediate calculations. Round your final answer to nearest whole dollar.)

b. Prepare the journal entries Purse recorded during 20X4 with regard to its investment in Scarf bonds. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round your intermediate calculations. Round your final answers to nearest whole dollar.)

-1/1/x4 Record the interest received on the bonds.

-7/1/x4 Record the interest received on the bonds.

-12/31/x4 Record the interest receivable on the bonds.

c. Prepare all worksheet consolidation entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements for 20X4. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round your intermediate calculations. Round your final answers to nearest whole dollar.)

-Record the entry to eliminate the effects of the intercompany ownership in the bonds.

-Record the entry to eliminate the intercompany interest receivables/payables.

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Answer #1

a). Interest expenses = value of bonds to non affiliates x interest rate + amortization of discount
= [($705000 - 470000) x 0.08] + [{($705000 - 470000) x 0.02} / 5 years]
= $18800+ $940

= $19740

b)

Date General Journal Debit Credit
Jan 1, 20X4 Cash (470000 x 8% for half year) $37,600
Interest Receivable $37,600
July 1 Cash (470000 x 8% for half year) $37,600
Investment in bonds (470000 x 2% for ten periods) $940
Interest Revenue $38,540
(To record accrual of interest and amortized 1/10 of bond discount)
Dec 31 Cash (470000 x 8% for half year) $37,600
Investment in bonds (470000 x 2% for ten periods) $940
Interest Revenue $38,540
(To record accrual of interest and amortized 1/10 of bond discount)
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