Question

[The following information applies to questions 3-6 displayed below.]

Kruse Corporation holds 60 percent of the voting common shares of Gary’s Ice Cream Parlors. On January 1, 20X6, Gary’s purchased $50,000 par value, 10 percent first mortgage bonds of Kruse from Cane for $58,000. Kruse originally issued the bonds to Cane on January 1, 20X4, for $53,000 (assuming a market interest rate of 9.074505 percent). The bonds have a 10-year maturity from the date of issue and pay interest semiannually on June 30th and December 31st.

Gary’s reported net income of $20,000 for 20X6, and Kruse reported income (excluding income from ownership of Gary’s stock) of $40,000.

Select the correct answer for each of the following questions.

2. [AICPA Adapted] P Company purchased term bonds at a premium on the open market. These bonds represented 20 percent of the outstanding class of bonds issued at a discount by S Company, P’s wholly owned subsidiary. P intends to hold the bonds to maturity. In a consolidated balance sheet, the difference between the bond carrying amounts of the two companies would be

Multiple Choice

a) Included as an increase in retained earnings.

b) Reported as a deferred debit to be amortized over the remaining life of the bonds.

c) Included as a decrease to retained earnings.

d) Reported as a deferred credit to be amortized over the remaining life of the bonds.

Answer 1