Use the following information to answer the question(s) below.

Pascalian Company owns a 90% interest in Sapp Company. On January 1, 2013, Pascalian had $300,000, 6% bonds outstanding with an unamortized premium of $9,000. The bonds mature on December 31, 2017. Sapp acquired one-third of Pascalian's bonds in the open market for $97,000 on January 1, 2013. Both companies use straight-line amortization of bond discounts/premiums. Interest is paid on December 31. On December 31, 2013, the books of the two affiliates held the following balances:
$$\begin{array} { l l }
6 \% \text { bonds payable } & \$ 300,000 \
\text { Premium on bonds } & 7,200 \
\text { Interest expense } & 16,200
\end{array}$$ $$\begin{array} { l l }
\text { Investment in Pascalian bonds } & \$ 97,600 \
\text { Interst income } & 6,600
\end{array}$$
-Consolidated Interest Expense and consolidated Interest Income,respectively,that appeared on the consolidated income statement for the year ended December 31,2013 was

Question

Use the following information to answer the question(s) below.

Pascalian Company owns a 90% interest in Sapp Company. On January 1, 2013, Pascalian had $300,000, 6% bonds outstanding with an unamortized premium of $9,000. The bonds mature on December 31, 2017. Sapp acquired one-third of Pascalian's bonds in the open market for $97,000 on January 1, 2013. Both companies use straight-line amortization of bond discounts/premiums. Interest is paid on December 31. On December 31, 2013, the books of the two affiliates held the following balances:
$$\begin{array} { l l } 
6 \% \text { bonds payable } & \$ 300,000 \
\text { Premium on bonds } & 7,200 \
\text { Interest expense } & 16,200
\end{array}$$ $$\begin{array} { l l } 
\text { Investment in Pascalian bonds } & \$ 97,600 \
\text { Interst income } & 6,600
\end{array}$$
-Consolidated Interest Expense and consolidated Interest Income,respectively,that appeared on the consolidated income statement for the year ended December 31,2013 was

Quizplus · Accepted Answer

Consolidated financial statements eliminate intercompany transactions because they are not transactions with external parties. Since Sapp (a subsidiary of Pascalian) owns a portion of Pascalian's bonds, the interest payments from Pascalian to Sapp are intercompany transactions and must be eliminated in consolidation. Therefore, the consolidated interest expense is the interest expense of Pascalian minus the interest income recognized by Sapp, which is $16,200 - $6,600 = $9,600. However, this calculation does not directly match any of the provided options, suggesting a misunderstanding in the question's interpretation based on the provided information. Given the options, the closest approach to handling intercompany transactions would be to eliminate the interest income and expense related to the intercompany bond ownership, but the correct calculation seems to have been misstated in the explanation. The principle, however, is that intercompany transactions are eliminated in consolidation, leading to the expectation that both interest expense and income related to these bonds would be adjusted out, not resulting in the options provided. Without a direct match, the explanation intended to convey the elimination principle in consolidations, but there appears to be a discrepancy in the calculation or option interpretation.