Question

Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold...

Light 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. Light 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.

1.) Based on the information given above, what amount of interest expense should be reported in the 20X8 consolidated income statement? Assume straight-line amortization method is used.

2.) Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X8 consolidated financial statements? Assume straight-line amortization method is used.

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Answer #1

Please find below answer:

Rate =6% and semiannually rate = 6%/2 =3%

Interest payable on bond value = 300000*3% = $9000

Total payment at the end =bond value+intrest payment =$309000.

Number of interest payment for a period of 10 year = 10*2 = 20

Present value of total payment = Present value of interest + present value of final payment

= $9000*3.5% (discount factor for 19 installment) +$309000*20th discount factor for 3.5%

=$9000*13.7098+$309000*0.502566

= $27,8681

Discount on bond = present value of total payment -bond value = $278,681-$300,000 = $21319

Amortize semiannually = 21319/20 =1065.95

Interest expense = $9000+$1065.95 = $10065.95

Interest expenses should be reported 20X8 = $1065.95-$1065.95*2/3 = $3355

Interest expenses will be eliminated = $10065.95*2/3 = $6711.

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