Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1,2004,at 105.The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31,2008,for $125,000.Mortar owns 75 percent of Granite's voting common stock.
-Based on the information given above,what amount of interest income will be eliminated in the preparation of the 2009 consolidated financial statements?

Question

Quizplus · Accepted Answer

The correct answer is A.The elimination of intercompany interest income is calculated as follows:Interest income on bonds owned by Mortar Corporation = $140,000 x 10% x 6/12 = $7,000Interest expense on bonds payable by Granite Company = $200,000 x 10% x 6/12 = $10,000Elimination of intercompany interest income = $7,000 - $10,000 = $17,000

Granite Company Issued $200,000 of 10 Percent First Mortgage Bonds