Question

On January 1, 2021, the Consolidated Company purchased 100% of the common stock Avergy Industries for $720,000. On that date, Avergy had a common stock of $100,000 and retained earnings of $420,000. Equipment and land were each undervalued by $50,000 on Avergy’s books. There was a $40,000 overvaluation of Bonds Payable, as well a $60,000 undervaluation of inventory. The consolidation entries necessary for date of acquisition balance sheet include all of the following except:
a. Bonds Payable credit, $40,000
b. Land debit, $50,000
c. Equipment debit, $50,000
d. Inventory debit, $60,000

Answer 1

Answer:

The correct option is A,bonds Payable credit, $40,000

Explanation:

Overvaluation of bonds by $40,000 means that the carrying value of the bond was $40,000 more than its true worth,an adjustment needs to be passed in the bonds payable account by a way of debit in order to bring the bonds payable to its true value.

Debit entry is required in the bonds payable account because the account itself is a liability account that naturally has a credit balance,in order to reduce the balance, a debit of $40,000 is needed not a credit of $40,000 as shown by option A