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,interest income will be:

Question

Quizplus · Accepted Answer

The interest income from the bonds is $200,000 * 8% = $16,000 annually, or $8,000 semiannually. Since the bonds were sold at a premium, the premium amortization must be considered. The premium is $245,000 - $200,000 = $45,000. Over 10 years, the semiannual amortization is $45,000 / 20 = $2,250. Therefore, the net interest income is $8,000 - $2,250 = $5,750 per period. For the year, this is $11,500. In consolidation, this interest income is eliminated, so it is debited.

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