On January 1,20X6,Nichols Corporation issued 10-year bonds at par to unrelated parties.The bonds have a 10% stated rate,face value of $300,000,and pay interest 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 effective interest 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

The interest expense of $30,000 should be reported on the consolidated income statement for the year 20X9 because the bonds were outstanding for the entire year and the effective interest method of amortization was used. The discount of $6,000 should not be reported as an extraordinary gain because Harn is an 80 percent owned subsidiary and the bonds were purchased in the open market, not directly from Nichols Corporation. Therefore, choice B is incorrect.

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