Master Corporation owns 85 percent of Servant Corporation's voting shares. On January 1, 20X8, Master Corporation sold $200,000 par value 8 percent bonds to Servant for $245,000. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.
Based on the information given above, in the preparation of the 20X8 consolidated financial statements, interest income will be:
A) debited for $11,500 in the eliminating entries.
B) credited for $11,500 in the eliminating entries.
C) debited for $16,000 in the eliminating entries.
D) credited for $16,000 in the eliminating entries.

Question

Quizplus · Accepted Answer

The interest income of $16,000 (8% of $200,000) is received by Servant Corporation from Master Corporation. In the consolidated financial statements, this intra-group interest income must be eliminated. Therefore, interest income is debited for $11,500, which is the interest income recognized by Servant Corporation for the period from January 1 to July 1, 20X8.

Master Corporation Owns 85 Percent of Servant Corporation's Voting Shares