On July 1, 2005, the beginning of a fiscal year, Pacific Corporation and its wholly owned subsidiary, Sommer Company, entered into the following intercompany transactions and events:
1. Pacific sold to Sommer for $16,000 a machine with a carrying amount of $12,000 ($30,000 cost less $18,000 accumulated depreciation). Sommer estimated a remaining economic life of eight years and no residual value for the machine. Sommer uses the straight-line method of depreciation for all plant assets.
2. Pacific acquired in the open market for $361,571 (a 12% yield) four-fifths of Sommer’s outstanding 8% bonds due June 30, 2008 (after June 30, 2005, interest had been paid on the bonds). Sommer’s accounting records on July 1, 2005, included the following ledger account balances:
The 8% bonds (interest payable each June 30) had been issued by Sommer July 1, 2003, to yield 10%. Bond issue costs may be disregarded. Interest expense recognized by Sommer through Year 2005 was as follows:
Both Sommer and Pacific use the interest method of amortization or accumulation of bond discount.
a. Prepare journal entries for Pacific Corporation to record the two transactions or events with Sommer Company on July 1, 2005, and intercompany interest revenue for the year ended June 30, 2006. (Disregard income taxes.)
b. Prepare working paper eliminations (in journal entry format) for Pacific Corporation and subsidiary on June 30, 2006. (Disregard income taxes.)
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