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 at 95.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 January 1 and July 1.
-Based on the information given above,what amount of interest receivable will be recorded by Puget Corporation on December 31,20X8,in its separate financial statements?
A)$5,000
B)$6,500
C)$10,000
D)$6,000

Question

Quizplus · Accepted Answer

Puget Corporation owns 80% of Sound Company's voting shares, which indicates that Puget Corporation has an investment in Sound Company and is therefore an affiliate. Puget Corporation purchased two-thirds of Sound Company's bonds, which means Puget Corporation has an 80% ownership interest in Sound Company and owns (80% × 2/3 = 53.33%) of the bonds.

The interest payable on the bonds is $300,000 × 6% = $18,000 annually, or $9,000 semiannually. Since Puget Corporation owns 53.33% of the bonds, its interest receivable on July 1, 20X8, is $9,000 × 53.33% = $4,800. Its interest receivable on December 31, 20X8, will be the same amount of $4,800 because no interest has been received or recognized since July 1, 20X8, and the bonds mature in ten years. Therefore, the correct answer is option D ($6,000).

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