Question

Puget 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. Puget 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.

8) Based on the information given above, what amount of interest expense should be reported in the

20X8 consolidated income statement?

A) $6,511 B) $0 C) $19,643 D) $6,548

9) Based on the information given above, what amount of interest income will Puget Corporation

recognize on December 31, 20X8 relative to the interest received on that day, in its separate

financial statements?

A) $6,557 B) $13,023 C) $6,538 D) $13,096

10) Based on the information given above, what amount of interest expense will be eliminated in the

preparation of the 20X8 consolidated financial statements?

A) $8,682 B) $8,730 C) $13,096 D) $13,023

Answer 1

Basic details
Coupon rate per Period (6%/2)			3.00%
Face value of bond			300,000
Market or Discounting rate per Period (7%/2)		3.50%	3.50%
Interest paid (300000*3%)			9000
Payment at end of period with Face value(300000+9000)			309000
Interest paid on		Semi annually	Semi annually

Present Value of bond
Period	Payment	Discounting Factor @ 3.5%	Present Value
1	9,000	0.966184	8695.65
2	9,000	0.933511	8401.60
3	9,000	0.901943	8117.48
4	9,000	0.871442	7842.98
5	9,000	0.841973	7577.76
6	9,000	0.813501	7321.51
7	9,000	0.785991	7073.92
8	9,000	0.759412	6834.70
9	9,000	0.733731	6603.58
10	9,000	0.708919	6380.27
11	9,000	0.684946	6164.51
12	9,000	0.661783	5956.05
13	9,000	0.639404	5754.64
14	9,000	0.617782	5560.04
15	9,000	0.596891	5372.02
16	9,000	0.576706	5190.35
17	9,000	0.557204	5014.83
18	9,000	0.538361	4845.25
19	9,000	0.520156	4681.40
20	309,000	0.502566	155292.86
Present value of Bond			278,681
Less: face value of Bond			300,000
Discount on Bond payable			21,319

Fair value
Interest payment (Credit Cash) = Face value of bond * Coupon rate
Interest Expense (Debit Interest Expense) = book value of Bond for previous period * Market or Discounting rate
Amortization of bond Discount (Credit Bond Discount) = Interest Expense - Interest payment
Debit Balance in Bond Discount = Debit Balance in Bond Discount for previous period - Amortization of bond Discount
Credit Balance in Bond Payable = Face value of bond
Book value of Bond = Credit Balance in Bond Payable - Debit Balance in Bond Discount
Bond Discount Amortization Table
Period	Date	Interest payment	Interest Expense	Amortization of bond Discount	Debit Balance in Bond Discount	Credit Balance in Bond Payable	Book value of Bond
0	Jan 1, 20X7				$ 21,318.60	$ 300,000.00	$ 278,681.40
1	June 30, 20X7	$    9,000.00	$    9,753.85	$     753.85	$ 20,564.76	$ 300,000.00	$ 279,435.24
2	Dec 31, 20X7	$    9,000.00	$    9,780.23	$     780.23	$ 19,784.52	$ 300,000.00	$ 280,215.48
3	June 30, 20X8	$    9,000.00	$    9,807.54	$     807.54	$ 18,976.98	$ 300,000.00	$ 281,023.02
4	Dec 31, 20X8	$    9,000.00	$    9,835.81	$     835.81	$ 18,141.18	$ 300,000.00	$ 281,858.82
5		$    9,000.00	$    9,865.06	$     865.06	$ 17,276.12	$ 300,000.00	$ 282,723.88
6		$    9,000.00	$    9,895.34	$     895.34	$ 16,380.78	$ 300,000.00	$ 283,619.22
7		$    9,000.00	$    9,926.67	$     926.67	$ 15,454.11	$ 300,000.00	$ 284,545.89
8		$    9,000.00	$    9,959.11	$     959.11	$ 14,495.00	$ 300,000.00	$ 285,505.00
9		$    9,000.00	$    9,992.67	$     992.67	$ 13,502.33	$ 300,000.00	$ 286,497.67
10		$    9,000.00	$ 10,027.42	$ 1,027.42	$ 12,474.91	$ 300,000.00	$ 287,525.09
11		$    9,000.00	$ 10,063.38	$ 1,063.38	$ 11,411.53	$ 300,000.00	$ 288,588.47
12		$    9,000.00	$ 10,100.60	$ 1,100.60	$ 10,310.93	$ 300,000.00	$ 289,689.07
13		$    9,000.00	$ 10,139.12	$ 1,139.12	$    9,171.82	$ 300,000.00	$ 290,828.18
14		$    9,000.00	$ 10,178.99	$ 1,178.99	$    7,992.83	$ 300,000.00	$ 292,007.17
15		$    9,000.00	$ 10,220.25	$ 1,220.25	$    6,772.58	$ 300,000.00	$ 293,227.42
16		$    9,000.00	$ 10,262.96	$ 1,262.96	$    5,509.62	$ 300,000.00	$ 294,490.38
17		$    9,000.00	$ 10,307.16	$ 1,307.16	$    4,202.46	$ 300,000.00	$ 295,797.54
18		$    9,000.00	$ 10,352.91	$ 1,352.91	$    2,849.54	$ 300,000.00	$ 297,150.46
19		$    9,000.00	$ 10,400.27	$ 1,400.27	$    1,449.28	$ 300,000.00	$ 298,550.72
20		$    9,000.00	$ 10,449.28	$ 1,449.28	$            0.00	$ 300,000.00	$ 300,000.00

Total Interest Expense of Sound Company in Separate financial statements
June 30, 20X8		$    9,807.54
Dec 31, 20X8		$    9,835.81
Total Interest Expense of Sound Company in Separate financial statements		$ 19,643.35
Answer 8
Total Interest Expense of Sound Company in Separate financial statements		$ 19,643.35
Total Interest Revenue of Puget Corporation in Separate financial statements (19643.35*2/3)		$ 13,095.57
Interest expense should be reported in the 20X8 consolidated income statement		$    6,547.78
Correct Option is D		$          6,548
Answer 9
Interest Expense on the date of December 31, 20X8		$    9,835.81
Interest income will Puget Corporation recognize on December 31, 20X8 relative to the interest received on that day, in its separate financial statements (9835.81*2/3)		$    6,557.21
Correct Option is A		$          6,557
Answer 10
Total Interest Revenue of Puget Corporation in Separate financial statements (19643.35*2/3)		$ 13,095.57
Interest expense will be eliminated in the preparation of the 20X8 consolidated financial statements (Hint: Inter company transaction should be eliminated.)		$ 13,095.57
Correct Option is C		$        13,096