Pesto Company possesses 80 percent of Salerno Companys outstanding voting stock. Pesto uses the initial value method

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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.


Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...
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Fundamentals of Advanced Accounting

ISBN: 978-0077862237

6th edition

Authors: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik

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