E 7-12 Computations and entries (parent purchases subsidiary bonds)

Pop Corporation, which owns an 80 percent interest in Son Corporation, purchases $100,000 of Son’s 8 percent bonds at 106 on July 2, 2016. The bonds pay interest on January 1 and July 1 and mature on July 1, 2019. Pop uses the equity method for its investment in Son. Selected data from the December 31, 2016, adjusted trial balances of the two companies are as follows:

Pop Son Interest receivable $ 4,000 $ —

Investment in Son 8% bonds 105,000 —

Interest payable — 40,000 8% bonds payable ($1,000,000 par) — 985,000 Interest income 3,000 —

Interest expense — 86,000 Gain or loss on retirement of intercompany bonds REQuIRED 1. Determine the amounts for each of the foregoing items that will appear in the consolidated financial statements on or for the year ended December 31, 2016.

2. Prepare in general journal form the workpaper adjustments and eliminations related to the foregoing bonds that are required to consolidate the financial statements of Pop and Son Corporations for the year ended December 31, 2016.

3. Prepare in general journal form the workpaper adjustments and eliminations related to the bonds that are required to consolidate the financial statements of Pop and Son Corporations for the year ended December 31, 2017.