Pancake Corporation owns 85 percent of Syrup Corporation's voting shares.On January 1,20X8,Pancake Corporation sold $200,000 par value 8 percent bonds to Syrup 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,premium on bonds payable will be:
A)debited for $45,000 in the consolidating entries.
B)credited for $40,500 in the consolidating entries.
C)debited for $40,500 in the consolidating entries.
D)credited for $45,000 in the consolidating entries.

Question

Quizplus · Accepted Answer

Since Pancake Corporation owns 85% of Syrup Corporation's voting shares, the two companies are required to prepare consolidated financial statements. When Pancake sells bonds to Syrup, it is considered an intercompany transaction. Therefore, when preparing the consolidated financial statements, the intercompany accounts should be eliminated, and the accounts should reflect the transactions as though they were with third parties. 
In this case, the premium on bonds payable is the difference between the face value of the bond ($200,000) and the amount Syrup Corporation paid for the bond ($245,000). Hence, the premium on bonds payable is $45,000. Since the premium was paid by Syrup to Pancake, it should be eliminated from the consolidated financial statements. Therefore, the premium on bonds payable will be debited for $40,500 ($45,000 x 85%) in the consolidating entries.

Pancake Corporation Owns 85 Percent of Syrup Corporation's Voting Shares