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In: Accounting

Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold...

Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold bonds with a par value of $300,000 when the market rate was 7 percent. Light purchased two thirds of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual interest rate of 6 percent. Interest is paid semiannually on June 30 and Dec 31.

1. Based on the information given above, what amount of interest expense should be reported in the 20X8 consolidated income statement? Assume straight-line amortization method is used.

a. $0

b. $6,711

c. $3,355

d. $13,421

2. Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X8 consolidated financial statements? Assume straight-line amortization method is used.

A. $13,421

B. $13,023

C. $6,711

D. $6,500

Solutions

Expert Solution

Basic details

Coupon rate per Period (6%/2)

3.00%

Face value of bond

      300,000

Market or Discounting rate per Period (7%/2)

3.50%

Interest paid (300000*3%)

9000

Payment at end of period with Face value(300000+9000)

309000

Interest paid on

Semi annually

Number of interest payment (10 years *2 times in a year)

20

Present Value of bond

Period

Payment

Discounting Factor @ 3.5%

Present Value

1

9000

0.966184

8695.65

2

9000

0.933511

8401.60

3

9000

0.901943

8117.48

4

9000

0.871442

7842.98

5

9000

0.841973

7577.76

6

9000

0.813501

7321.51

7

9000

0.785991

7073.92

8

9000

0.759412

6834.70

9

9000

0.733731

6603.58

10

9000

0.708919

6380.27

11

9000

0.684946

6164.51

12

9000

0.661783

5956.05

13

9000

0.639404

5754.64

14

9000

0.617782

5560.04

15

9000

0.596891

5372.02

16

9000

0.576706

5190.35

17

9000

0.557204

5014.83

18

9000

0.538361

4845.25

19

9000

0.520156

4681.40

20

309000

0.502566

155292.86

Present value of Bond

278681

Less: face value of Bond

300000

Discount on Bond payable

21319

Divided by: Number of interest payment

20

Amortization of Discount

1065.93

Amortization of Discount

1065.93

Add: Interest payment

9000.00

Interest expense Recorded by Sound Corporation

10065.93

Less: interest expense will be eliminated for preparation of consolidated financial statements (10065.93*2/3)

6710.62

Interest expense should be reported in the 20X8 consolidated income statement

3355.31

From above solution

Correct option

Answer 1

Interest expense should be reported

C

3355

Answer 2

Interest expense will be eliminated

C

6711

ekkarill92 answered 1 year ago
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