On January 1,20X6,Pepper Corporation issued 10-year bonds at par to unrelated parties.The bonds pay interest of $15,000 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 straight-line 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 consolidated income statement for the year 20X9 should report interest expense of $30,000. This is because, from a consolidated perspective, the transaction between Pepper Corporation and its subsidiary Salt Corporation is eliminated. The interest expense reported is based on the original terms of the bond issued by Pepper, which is $15,000 every six months, totaling $30,000 annually. The purchase of the bonds by Salt at a discount and the subsequent amortization of that discount do not affect the consolidated interest expense.

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