Spice Company issued $200,000 of 10 percent first mortgage bonds on January 1,20X4,at 105.The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.Pumpkin Corporation purchased $140,000 of Spice's bonds from the original purchaser on January 1,20X8,for $122,000.Pumpkin owns 75 percent of Spice's voting common stock.Spice's partial bond amortization schedule is as follows:

-Based on the information given above,what amount of interest income will be eliminated in the preparation of the 20X9 consolidated financial statements?

Question

Spice Company issued $200,000 of 10 percent first mortgage bonds on January 1,20X4,at 105.The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.Pumpkin Corporation purchased $140,000 of Spice's bonds from the original purchaser on January 1,20X8,for $122,000.Pumpkin owns 75 percent of Spice's voting common stock.Spice's partial bond amortization schedule is as follows:
 
-Based on the information given above,what amount of interest income will be eliminated in the preparation of the 20X9 consolidated financial statements?

Quizplus · Accepted Answer

In 20X9, Pumpkin Corporation owns 75% of Spice Company's common stock, which means Spice Company is a subsidiary of Pumpkin Corporation. As per the partial bond amortization schedule given, the unamortized bond premium as of January 1, 20X9, is $4,620 ($22,370 - $17,750). 
So, Pumpkin Corporation should eliminate 75% of the bond premium, which is $3,465 ($4,620 x 75%). Also, Pumpkin Corporation purchased the bonds on January 1, 20X8, which means it would have received interest payment on July 1, 20X8, and January 1, 20X9. 
Therefore, Pumpkin Corporation should eliminate 75% of the interest income received from Spice Company for the period July 1, 20X8, to January 1, 20X9, which is $12,955 [($140,000/$200,000) x $18,400 x 75%]. 
Hence, the total interest income eliminated in the preparation of the 20X9 consolidated financial statement is $16,420 ($3,465 + $12,955), which is option A.

Spice Company Issued $200,000 of 10 Percent First Mortgage Bonds