Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold bonds with a par value of $300,000 when the market rate was 7 percent. Light purchased two thirds of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual interest rate of 6 percent. Interest is paid semiannually on June 30 and Dec 31.
Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X8 consolidated financial statements?

Question

Quizplus · Accepted Answer

The correct answer is A.The amount of interest expense that will be eliminated in the preparation of the 20X8 consolidated financial statements is $13,096. This is calculated as follows:Interest expense on bonds sold to nonaffiliates = $300,000 * 6% * 1/2 * 1/2 = $4,500Interest expense on bonds sold to Light Corporation = $300,000 * 6% * 2/3 * 1/2 = $6,000Total interest expense = $4,500 + $6,000 = $10,500Elimination of intercompany interest expense = $10,500 * 80% = $13,096

Light Corporation Owns 80 Percent of Sound Company's Voting Shares