Question

[The following information applies to questions 3-6 displayed below.]

Kruse Corporation holds 60 percent of the voting common shares of Gary’s Ice Cream Parlors. On January 1, 20X6, Gary’s purchased $50,000 par value, 10 percent first mortgage bonds of Kruse from Cane for $58,000. Kruse originally issued the bonds to Cane on January 1, 20X4, for $53,000 (assuming a market interest rate of 9.074505 percent). The bonds have a 10-year maturity from the date of issue and pay interest semiannually on June 30th and December 31st.

Gary’s reported net income of $20,000 for 20X6, and Kruse reported income (excluding income from ownership of Gary’s stock) of $40,000.

Select the correct answer for each of the following questions.

4) What amount of interest income does Gary’s Ice Cream Parlors record for 20X6? (Do not round your intermediate calculations. Round your final answer to nearest whole dollar.)

$4,145

$4,233

$5,000

$6,000

5) What gain or loss on the retirement of bonds should be reported in the 20X6 consolidated income statement? (Do not round your intermediate calculations. Round your final answer to nearest whole dollar.)

Multiple Choice

• $2,423 gain

• $5,408 loss

• $8,004 loss

• $5,617 gain

6.) What amount of consolidated net income should be reported for 20X6? (Round your intermediate calculations and your final answer to nearest whole dollar.)

Multiple Choice

• $47,253

• $54,410

• $55,126

• $60,256

Answer 1

4) Solution: $4,233
Working: 46,670 * 9.07% = 4233
5) Solution: $5,408 loss
Working:

Carrying value   52,592     
Purchase price    58,000     
Loss   -5,408     

6) Solution: $55,126
Working:

Operating income of Kruse Corporation   40,000     
Net income of Gary's Ice Cream Parlors   20,000     
   60,000     
Less: Loss on bond retirement   -5,408     
Recognition during 20X6 (4767 - 4233)   534     
Consolidated net income   55,126