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 interest income will be eliminated in the preparation of the 20X9 consolidated financial statements?

Question

Quizplus · Accepted Answer

Mortar Corporation owns 75 percent of Granite's voting common stock, so it will eliminate 75 percent of the interest income on the bonds. The bonds pay interest semiannually, so the interest income for the year is $200,000 x 10% x 1/2 = $10,000. Mortar will eliminate 75 percent of this amount, or $10,000 x 75% = $7,500. The bonds were purchased at a discount, so Mortar will also amortize the discount over the life of the bonds. The discount is $200,000 - $125,000 = $75,000. The amortization for the year is $75,000 / 10 years = $7,500. Mortar will eliminate 75 percent of this amount, or $7,500 x 75% = $5,625. The total amount of interest income that will be eliminated is $7,500 + $5,625 = $13,125.

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