Question
Pesto Company possesses 80% of Salerno Company's outstanding voting stock. Pesto uses the intial value method to account for this investment. On January 1, 2014,
Pesto Company possesses 80% of Salerno Company's outstanding voting stock. Pesto uses the intial value method to account for this investment. On January 1, 2014, Pesto sold 9% 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, 2017, Salerno acquired 40% of these same bondsfrom an outside party at 96.6% of fave value. Both companies use the straigh-line method of amortization. For a 2018 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
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