Computations Following Parent's Acquisition of Subsidiary Bonds
Mainstream Corporation holds 80 percent of Offenberg Company's voting shares, acquired on January 1, 20X1, at underlying book value. On January 1, 20X4, Mainstream purchased Offenberg bonds with a par value of $40,000. The bonds pay 10 percent interest annually on December 31 and mature on December 31, 20X8. Mainstream uses the fully adjusted equity method in accounting for its ownership in Offenberg. Partial balance sheet data for the two companies on December 31, 20X5, are as follows:
| Mainstream Corporation | Offenberg Company |
Investment in Offenberg Company Stock | $121,680 |
|
Investment in Offenberg Company Bonds | 42,400 |
|
Interest Income | 3,200 |
|
Bonds Payable |
| $100,000 |
Bond Premium |
| 11,250 |
Interest Expense |
| 6,250 |
Common Stock | 300,000 | 100,000 |
Retained Earnings, December 31, 20X5 | 501,680 | 50,000 |
Required
a. Compute the gain or loss on bond retirement reported in the 20X4 consolidated income statement.
b. What equity method entry would Mainstream Corp. make on its books related to the bond retirement in 20X5?
c. Prepare the eliminating entry needed to remove the effects of the intercorporate bond ownership in completing the consolidation worksheet for 20X5.
d. What balance should be reported as consolidated retained earnings on December 31, 20X5?
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