Pan Corporation owns 65 percent of Sauce Corporation's voting shares.On January 1,20X3,Pan Corporation sold $300,000 par value 7 percent bonds to Sauce when the market interest rate was 4 percent.The bonds mature in 15 years and pay interest semiannually on June 30 and December 31.
-Based on the information given above,in the preparation of the 20X3 consolidated financial statements,interest income will be:

Question

Quizplus · Accepted Answer

Interest income and interest expense between Pan Corporation and Sauce Corporation must be eliminated in the consolidation process because these amounts are intercompany transactions. The interest income recognized by Sauce (the investor) on the bonds would be $300,000 * 7% = $21,000 annually or $10,500 semiannually. However, since interest is paid semiannually, and the question asks for the interest income in the consolidation entries for the year 20X3, the total annual interest income of $21,000 recognized by Sauce would be eliminated against the interest expense recognized by Pan. This elimination is done by debiting interest income (to reduce it) and crediting interest expense (to reduce it) in the consolidation entries.

Pan Corporation Owns 65 Percent of Sauce Corporation's Voting Shares