On January 1,20X6,Nichols Corporation issued 10-year bonds at par to unrelated parties.The bonds pay interest of $15,000 every June 30 and December 31.On December 31,20X9,Harn Corporation purchased all of Nichols' bonds in the open market at a $6,000 discount.Harn is Nichols' 80 percent owned subsidiary.Harn uses the straight line method of amortization.The consolidated income statement for the year 20X9 should report with respect to the bonds:
I.interest expense of $30,000.
II.an extraordinary gain of $6,000.

Question

Quizplus · Accepted Answer

Since Harn Corporation uses the straight-line method of amortization, it will amortize the bond discount of $6,000 over the remaining life of the bonds, which is 3 years (10 years - 6 years since issuance).

The annual amortization expense will be $6,000 ÷ 3 = $2,000.

Therefore, the interest expense to be recognized by the consolidated entity for the year 20X9 will be the sum of the semi-annual interest payments, which is $15,000 + $15,000 = $30,000, less the amortization of bond discount of $2,000 ($1,000 for each semi-annual period).

Hence, the consolidated income statement for the year 20X9 should report interest expense of $30,000.

There is no extraordinary gain to be recognized in this scenario.

On January 1,20X6,Nichols Corporation Issued 10-Year Bonds at Par to Unrelated