Chapter 8, Problem 8.2E

Computation of Transfer Price (Effective Interest Method)
Stallion Corporation sold $100,000 par value, 10−year first mortgage bonds to Pony Corporation on January 1, 20X5. The bonds, which bear a nominal interest rate of 12 percent, pay interest semiannually on January 1 and July 1. The current market interest rate is 11 percent. Pony Corporation owns 65 percent of the voting stock or Stallion Corporation, and consolidated statements are prepared on December 31, 20X7.

Required
a. What was the original purchase price of the bonds to Pony Corporation?
b. What is the balance in Pony’s bond investment account on December 31, 20X7?
c. Give the worksheet consolidation entry or entries needed to remove the effects of the intercompany ownership of bonds in preparing consolidated financial statements for 20X7.