Puget Corporation owns 80 percent of Sound Company's voting shares.On January 1,20X7,Sound sold bonds with a par value of $300,000 when the market rate was 7 percent.Puget purchased two thirds of the bonds;the remainder was sold to nonaffiliates.The bonds mature in ten years and pay an annual interest rate of 6 percent.Interest is paid semiannually on June 30 and Dec 31.
-Based on the information given above,what amount of interest expense will be eliminated in the preparation of the 20X8 consolidated financial statements?

Question

Quizplus · Accepted Answer

Puget Corporation owns 80% of Sound Company's voting shares, which means Sound Company is a subsidiary of Puget Corporation. Therefore, Puget Corporation and Sound Company should prepare consolidated financial statements.

Puget Corporation purchased two-thirds of Sound Company's $300,000 bonds, which equals $200,000. The annual interest rate is 6%, and the interest is paid semiannually. Therefore, the semi-annual interest payment is $6,000 ($200,000 x 0.06 / 2).

Puget Corporation should eliminate the intercompany interest income of $4,800 ($6,000 x 80%) in the consolidated financial statements because it is earned from a subsidiary. Additionally, Sound Company should eliminate the interest expense of $1,200 ($6,000 x 20%) because it is paid to a parent company.

Therefore, the total amount of interest expense eliminated in the preparation of the 20X8 consolidated financial statements is $6,000 ($4,800 + $1,200) for each semi-annual payment.

Thus, the amount of interest expense eliminated in the preparation of the 20X8 consolidated financial statements is $13,096 (2 x $6,548).

Therefore, the correct answer is A) $13,096.

Puget Corporation Owns 80 Percent of Sound Company's Voting Shares