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 at 95. 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 January 1 and July 1.
Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X8 consolidated financial statements?
A) $13,000
B) $13,500
C) $10,000
D) $15,000

Question

Quizplus · Accepted Answer

The correct answer is A.The amount of interest expense that will be eliminated in the preparation of the 20X8 consolidated financial statements is $13,000. This is because Light Corporation owns 80% of Sound Company's voting shares, and therefore 80% of the interest expense on the bonds will be eliminated in consolidation. The total interest expense on the bonds is $18,000 (6% x $300,000), and 80% of this amount is $13,000.

Light Corporation Owns 80 Percent of Sound Company's Voting Shares