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,interest income will be:
A)debited for $11,500 in the consolidating entries.
B)credited for $11,500 in the consolidating entries.
C)debited for $16,000 in the consolidating entries.
D)credited for $16,000 in the consolidating entries.

Question

Quizplus · Accepted Answer

CIn the preparation of consolidated financial statements, intercompany transactions, such as the interest income and expense between Pancake Corporation and Syrup Corporation, are eliminated. Therefore, both the interest income recognized by Syrup and the interest expense recognized by Pancake need to be eliminated. The bond's stated interest rate is 8% of the $200,000 par value, which equals $16,000 annually or $8,000 semiannually. Since the interest is paid semiannually, for the year, this amounts to $16,000 in total interest. This interest is both credited as income by Syrup and debited as an expense by Pancake. In the consolidation process, these entries are eliminated against each other, resulting in a debit (to eliminate the interest income recognized by Syrup) and a credit (to eliminate the interest expense recognized by Pancake) of $16,000 each in the consolidating entries.

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