Soap & Pumice: Soap Company issued $200,000 of 8%, 5-year bonds on January 1, 20X6. The discount on issuance was $12,000. Bond interest is paid annually on December 31. On December 31, 20X8, Pumice Company purchased one-half of the outstanding bonds for $96,000. Both companies use the straight-line method of amortization.
-Refer to Soap & Pumice. How much bond interest expense will appear on the December 31, 20X8, consolidated income statement?

Question

Quizplus · Accepted Answer

The total annual bond interest is $16,000 ($200,000 * 8%). The annual amortization of the discount is $2,400 ($12,000 / 5 years). Therefore, the total bond interest expense is $18,400 ($16,000 + $2,400). Since Pumice purchased half of the bonds, the intercompany interest of $8,000 ($16,000 / 2) is eliminated, leaving $18,400 as the consolidated interest expense.

Soap & Pumice: Soap Company Issued $200,000 of 8%, 5-Year