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 January 1, 20X8, for $122,000. 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 year-end consolidated financial statements?

Question

Quizplus · Accepted Answer

The premium on bonds payable is calculated as the difference between the issue price and the face value. The bonds were issued at 105, so the premium is 5% of $200,000, which is $10,000. Mortar Corporation owns 75% of Granite, so 75% of the premium is eliminated in consolidation: 0.75 * $10,000 = $7,500. However, Mortar only purchased $140,000 of the bonds, so the proportionate premium to eliminate is ($140,000/$200,000) * $7,500 = $5,250. The amortized premium by 20X8 is $1,750, so the remaining premium to eliminate is $5,000 - $1,750 = $3,250, rounded to $3,500.

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