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 interest expense will appear on the December 31, 2019, 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 interest expense will appear on the December 31, 2019, consolidated income statement?

Quizplus · Accepted Answer

The interest expense for the bonds is calculated as follows: The annual interest payment is $200,000 * 8% = $16,000. The annual amortization of the discount is $12,000 / 5 = $2,400. Therefore, the total annual interest expense is $16,000 + $2,400 = $18,400. Since Pumice Company purchased half of the bonds, the interest expense for the consolidated income statement is $18,400 / 2 = $9,200.

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