The working paper eliminations (in journal entry format) for intercompany bonds of Pullet Corporation and its wholly owned subsidiary on November 30, 2006, the end of a fiscal year, follow. The bonds, which had been issued by Sagehen Company for a five-year term on November 30, 2005, to yield 10%, were acquired in the open market by Pullet on November 30, 2006, to yield 12%. Interest on the bonds is payable at the rate of 8% each November 30, 2007 through 2009. Both companies use the interest method of amortization or accumulation of bond premium or discount.
Instructions
a. Prepare journal entries for both Pullet Corporation and Sagehen Company to recognize intercompany interest revenue and expense, respectively, on November 30, 2007. Disregard Sagehen’s bonds owned by outsiders.
b. Prepare working paper eliminations (in journal entry format) for Pullet Corporation and subsidiary on November 30, 2007, including allocation of income taxes.
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