Master Corporation owns 85 percent of Servant Corporation's voting shares.On January 1,20X8,Master Corporation sold $200,000 par value 8 percent bonds to Servant for $245,000.The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.
-Based on the information given above,in the preparation of the 20X8 consolidated financial statements,premium on bonds payable will be:

Question

Quizplus · Accepted Answer

In preparing the consolidated financial statements, the intercompany bond transaction between Master Corporation and Servant Corporation needs to be eliminated. The premium on bonds payable account, which represents the excess of the issue price over the par value of the bonds, should also be eliminated.

Since Servant Corporation purchased the bonds at a premium of $45,000 ($245,000 - $200,000), this amount should be debited to eliminate the premium on bonds payable account. Therefore, the correct answer is option C, which is "debited for $40,500 in the eliminating entries" ($45,000 x 0.85 = $38,250, rounded to $40,500).

Master Corporation Owns 85 Percent of Servant Corporation's Voting Shares