On January 1,2006,Nichols Corporation issued 10-year bonds at par to unrelated parties.The bonds pay interest of $15,000 every June 30 and December 31.On December 31,2009,Harn Corporation purchased all of Nichols' bonds in the open market at a $6,000 discount.Harn is Nichols' 80 percent owned subsidiary.Harn uses the straight line method of amortization.The consolidated income statement for the year 2009 should report with respect to the bonds: I.interest expense of $30,000.
II)an extraordinary gain of $6,000.

Question

Quizplus · Accepted Answer

Since Harn Corporation uses the straight line method of amortization, the original discount of $6,000 would be amortized over the remaining life of the bonds, which would be 6 years (10 years - 4 years since issuance). This would result in an annual amortization of $1,000 ($6,000/6 years). Therefore, the interest expense on the consolidated income statement for 2009 would be $30,000 ($15,000 interest paid to unrelated parties + $15,000 interest paid to Harn) and there would be no extraordinary gain.

On January 1,2006,Nichols Corporation Issued 10-Year Bonds at Par to Unrelated