Prince Company acquires Duchess, Inc.on January 1, 2016.At the date of acquisition, Duchess has long-term debt with a fair value of $1,500,000 and a carrying amount of $1,200,000. With respect to long-term debt consolidation worksheet adjustments in periods following the acquisition, which of the following is correct:
A) Debit Interest Expense and Credit Long-Term Debt Expense.
B) Prince must recognize an increase in interest expense if the amount is material.
C) Do not adjust the value of the debt because Prince is not obligated to repay the debt.
D) Credit Long-Term Debt and Debit Interest Expense on the balance sheet of Duchess
E) Debit Long-Term Debt and Credit Interest Expense

Question

Quizplus · Accepted Answer

The carrying amount of the debt is less than the fair value, so the difference is recognized as a gain on the income statement and the debt is increased to fair value on the balance sheet.

Prince Company Acquires Duchess, Inc