Question

On January 1, 20X4, Polar Corp. paid $104,000 for $100,000 par value, 9% bonds of Seal Corp. Seal had issued $300,000 of the 10-year bonds on January 1, 20X2 for $360,000. The bonds pay interest semi-annually. Polar had previously purchased 80% of the common stock of Seal on January 1, 20X1, at underlying book value. Polar reported operating income (excluding income from subsidiaries) of $50,000 and Seal reported net income of $30,000 for 20X4. Both companies use straight-line amortization. What amount of interest expense and gain/loss should be included in the 20X4 consolidated income statement

Answer 1

Answer:

$14,000

Explanation:

Amount of interest expense = [(Bond issued by 'S' company x 9%) - Amount of    

                                                   premium x (unsold bonds / Bonds issued)]

                                           =  (300,000 x 0.09) - 60000/10 x 200,000/300,000

                                          =  (27,000 - 6000) x 0.66667

                                          =  21,000 x 0.66667

                                          = $14,000