Question

Wood Corporation owns 70 percent of Carter Company's voting shares. On January 1, 20X3, Carter sold bonds with a par value of $675,000 at 98. Wood purchased $450,000 par value of the bonds; the remainder was sold to nonaffiliates. The bonds mature in five years and pay an annual interest rate of 8 percent. Interest is paid semiannually on January 1 and July 1. Required: a. What amount of interest expense should be reported in the 20X4 consolidated income statement? (Do not round your intermediate calculations. Round your final answers to nearest whole dollar.) I came out to 18,900 but that is not correct. Please provide step by step. Thank you for your time.

Answer 1

a. Calculation of interest expense that should be reported in the 20X4 consolidated income statement:

In the consolidated income statement, only that amount of interest will be recorded as interest expense that is associated with the bonds sold to non affiliates.

Cash interest to non affiliates for 20X4 = ($675,000 - $450,000) x 8% = $225,000 x 8% = $18,000

Discount to be amortised = ($225,000 x .02) / 5 = $900

Interest expense to be recorded on the consolidated income statement = $18,000 + $900 = $18,900