Paper Corporation holds 80 percent of the voting shares of Scissor Company.On January 1,20X8,Scissor purchased $100,000 par value 12 percent first mortgage bonds of Paper from Cruse for $115,000.Paper originally issued the bonds to Cruse on January 1,20X6,for $110,000.The bonds have an 8-year maturity from the date of issue.Scissor's reported net income of $65,000 for 20X8,and Paper reported income (excluding income from ownership of Scissor's stock)of $90,000.
-Based on the information given above,what amount of interest expense does Paper record annually?
A)$10,750
B)$9,500
C)$2,500
D)$12,000

Question

Quizplus · Accepted Answer

Paper Corporation records interest expense of $10,750 annually on the bonds held by Scissor Company. This is calculated as follows:Interest expense = Bond face value x Stated interest rate x Paper's ownership percentage= $100,000 x 12% x 80%= $10,750

Paper Corporation Holds 80 Percent of the Voting Shares of Scissor