Powell Company owns an 80% interest in Sauter, Inc.On January 1, 2016, Sauter issued $400,000 of 10-year, 12% bonds at a premium of $50,000.On December 31, 2021, 5 years after original issuance, Powell purchased all of the outstanding bonds for $390,000.Both firms use the straight-line method of amortization.
The interest adjustment in the 2021 subsidiary income distribution schedule is ____.

Question

Powell Company owns an 80% interest in Sauter, Inc.On January 1, 2016, Sauter issued $400,000 of 10-year, 12% bonds at a premium of $50,000.On December 31, 2021, 5 years after original issuance, Powell purchased all of the outstanding bonds for $390,000.Both firms use the straight-line method of amortization. ​
The interest adjustment in the 2021 subsidiary income distribution schedule is ____.

Quizplus · Accepted Answer

The premium on the bonds was $50,000 and they were originally issued for $400,000. Thus, the bond's carrying value at the time of Powell's purchase was $450,000 (original issuance price + premium amortization). However, Powell purchased the bonds for only $390,000, resulting in a loss of $60,000 for Sauter ($450,000 - $390,000). This loss needs to be recognized in the subsidiary income distribution schedule.

Since the bonds were purchased at the end of the year, the interest has already been accrued and paid for the year. Therefore, there is no adjustment needed for interest in the 2021 subsidiary income distribution schedule.

The $60,000 loss is allocated to the noncontrolling interest (20% of Sauter's ownership not owned by Powell), resulting in a $12,000 reduction in the noncontrolling interest's share of Sauter's net income.

The calculation for the interest adjustment in the subsidiary income distribution schedule is as follows:

Loss on bond purchase: $60,000
Noncontrolling interest's share of loss: $60,000 x 20% = $12,000
Interest adjustment: $0 
Total adjustment to subsidiary income distribution schedule: -$12,000

Therefore, the interest adjustment in the 2021 subsidiary income distribution schedule is $0.

Powell Company Owns an 80% Interest in Sauter, Inc