Granite 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. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite'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?

Question

Quizplus · Accepted Answer

The premium on bonds payable is initially $10,000 ($200,000 x 5%). Since Mortar owns 75% of Granite, they eliminate 75% of the premium related to the bonds they purchased. The premium on the $140,000 bonds is $7,000 ($140,000 x 5%), and 75% of this is $5,250. However, the premium amortized over 5 years (half of the bond's life) needs to be considered. The annual amortization is $1,000 ($10,000/10 years), so for 5 years, it's $5,000. The remaining premium is $5,000, and 75% of this is $3,750. The correct choice is $3,500, which is the closest to the calculated amount.

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