Puget Corporation owns 80 percent of Sound Company's voting shares.On January 1,20X7,Sound sold bonds with a par value of $300,000 when the market rate was 7 percent.Puget 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 June 30 and Dec 31.
-Based on the information given above,what amount of interest expense should be reported in the 20X8 consolidated income statement?
A)$0
B)$6,548
C)$6,511
D)$19,643

Question

Quizplus · Accepted Answer

The interest expense on the bonds held by Puget Corporation is eliminated in consolidation because they are intercompany bonds. Only the interest on the bonds held by nonaffiliates is reported. The interest expense for the nonaffiliates is calculated as follows: $100,000 (1/3 of $300,000) * 6% = $6,000 annually. Since interest is paid semiannually, the interest expense for 20X8 is $6,000.

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