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 expense will be eliminated in the preparation of the 2009 consolidated financial statements?

Question

Quizplus · Accepted Answer

The carrying value of the bonds on December 31, 2008, would be:
$140,000 × 105% = $147,000
The amount paid by Mortar Corporation on December 31, 2008, is below the carrying value by:
$147,000 − $125,000 = $22,000
The amortization of discount recorded in 2009 would therefore be:
($22,000 ÷ 5 years to maturity) × 6/12 = $2,200
However, Mortar owns 75 percent of Granite's voting common stock, so 75 percent of the interest expense of $2,200 on these bonds ($1,650 = $2,200 ×75%) would be eliminated in the preparation of the 2009 consolidated financial statements:
$2,200 – $1,650 = $550
Thus, the amount of interest expense eliminated in the preparation of the 2009 consolidated financial statements is $13,300 ($550 × 24 semiannual periods). Therefore, the answer is B) $13,300.

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