Spice Company issued $200,000 of 10 percent first mortgage bonds on January 1,20X4,at 105.The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.Pumpkin Corporation purchased $140,000 of Spice's bonds from the original purchaser on December 31,20X8,for $125,000.Pumpkin owns 75 percent of Spice's voting common stock.
-Based on the information given above,what amount of premium on bonds payable will be eliminated in the preparation of the 20X8 consolidated financial statements?
A)$3,500
B)$2,800
C)$5,000
D)$2,500

Question

Quizplus · Accepted Answer

The premium on bonds payable is calculated as the difference between the issue price and the face value of the bonds. The bonds were issued at 105, which means they were issued at a 5% premium. The face value of the bonds is $200,000, so the premium is $10,000 ($200,000 * 5%). Since Pumpkin Corporation purchased $140,000 of the bonds, the proportionate premium is $7,000 ($10,000 * $140,000 / $200,000). The bonds have been outstanding for 5 years, and the premium is amortized over 10 years, so half of the premium has been amortized. Therefore, the remaining premium to be eliminated is $3,500 ($7,000 / 2).

Spice Company Issued $200,000 of 10 Percent First Mortgage Bonds