On January 1,20X6,Pepper Corporation issued 10-year bonds at par to unrelated parties.The bonds have a 10% stated rate,face value of $300,000,and pay interest every June 30 and December 31.On December 31,20X9,Salt Corporation purchased all of Pepper's bonds in the open market at a $6,000 discount.Salt is Pepper's 80 percent owned subsidiary.Salt uses the effective interest method of amortization.The consolidated income statement for the year 20X9 should report with respect to the bonds:
I.interest expense of $30,000.
II.a gain of $6,000.

Question

Quizplus · Accepted Answer

The correct answer is A because the consolidated income statement should report interest expense of $30,000, which is the amount of interest paid by Pepper Corporation to Salt Corporation during the year. The gain of $6,000 is not reported on the consolidated income statement because it is an intercompany transaction.

On January 1,20X6,Pepper Corporation Issued 10-Year Bonds at Par to Unrelated