Computing Carrying Value, Interest Revenue and Expense, Controlling and Noncontrolling Income
On January 2, 2011, Peoples, Inc. acquired an 80% interest in Schmidt Corporation for $900,000. Schmidt reported total stockholders” equity of $1,000,000 on this date. An examination of Schmidt”s books revealed that book value was equal to fair value for all assets and liabilities except for inventory, which was undervalued by $60,000. All of the undervalued inventory was sold during 2011.
Peoples also purchased 30% of the $500,000 par value outstanding bonds of Schmidt Corporation for $140,000 on January 2, 2011. The bonds mature in 10 years, carry an 11% annual interest rate payable on June 30 and December 31, and had a carrying value of $505,000 on the date of purchase. Both companies use the straight-line method to amortize bond discounts and premiums.
Peoples reported net income of $300,000 for 2011 and paid dividends of $130,000 during 2011. Schmidt Corporation reported net income of $320,000 for 2011 and paid dividends of $90,000 during the year.
Required:
Compute the following items at December 31, 2011:
- Carrying value of the debt.
- Interest revenue reported by Peoples, Inc.
- Interest expense reported by Schmidt Corporation
- Balance in the Investment in Schmidt Bonds account.
- Controlling interest in consolidated net income for 2011 using the t-account approach.
- Noncontrolling interest in consolidated income for 2011.