Soap Company issued $200,000 of 8%, 5-year bonds on January 1, 2016.The discount on issuance was $12,000.Bond interest is paid annually on December 31.On December 31, 2018, Pumice Company purchased one-half of the outstanding bonds for $96,000.Both companies use the straight-line method of amortization.
How much bond interest expense will appear on the December 31, 2018, consolidated income statement?

Question

Soap Company issued $200,000 of 8%, 5-year bonds on January 1, 2016.The discount on issuance was $12,000.Bond interest is paid annually on December 31.On December 31, 2018, Pumice Company purchased one-half of the outstanding bonds for $96,000.Both companies use the straight-line method of amortization. ​
How much bond interest expense will appear on the December 31, 2018, consolidated income statement?

Quizplus · Accepted Answer

The bond interest expense on the consolidated income statement includes the interest paid on the bonds and the amortization of the discount. The total interest paid on the bonds is 8% of $200,000, which equals $16,000. The discount on the bonds is $12,000, which is amortized over 5 years using the straight-line method, resulting in an annual amortization of $2,400 ($12,000 / 5 years). Therefore, the total bond interest expense is $16,000 (interest paid) + $2,400 (amortization of discount) = $18,400.

Soap Company Issued $200,000 of 8%, 5-Year Bonds on January