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 interest income will be eliminated in the preparation of the 20X9 consolidated financial statements?
A)$17,000
B)$13,300
C)$18,500
D)$22,200

Question

Quizplus · Accepted Answer

The correct answer is A.The interest income to be eliminated is the interest income earned by Pumpkin Corporation on the bonds it purchased from the original purchaser. The interest income earned by Pumpkin Corporation for the six months ended December 31, 20X8, is $7,000 ($140,000 x 10% x 6/12). The interest income earned by Pumpkin Corporation for the year ended December 31, 20X9, is $14,000 ($140,000 x 10% x 12/12). The total interest income to be eliminated is $21,000 ($7,000 + $14,000). However, since Pumpkin Corporation only owns 75% of Spice Company, the amount of interest income to be eliminated is $17,000 ($21,000 x 75%).

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