Multiple-Choice Questions (Effective Interest Method) Select the correct answer f...

Multiple-Choice Questions (Effective Interest Method)

Select the correct answer for each of the following questions.

1. [AICPA Adapted] Wagner, a holder of a $1,000,000 Palmer Inc. bond, collected the interest due on March 31, 20X8, and then sold the bond to Seal Inc. for $975,000. On that date, Palmer, a 75 percent owner of Seal, had a $1,075,000 carrying amount for this bond. What was the effect of Seal’s purchase of Palmer’s bond on the retained earnings and noncontrolling interest amounts reported in Palmer’s March 31, 20X8, consolidated balance sheet?

2. [AICPA Adapted] P Company purchased term bonds at a premium on the open market.

These bonds represented 20 percent of the outstanding class of bonds issued at a discount by S Company, P’s wholly owned subsidiary. P intends to hold the bonds to maturity. In a consolidated balance sheet, the difference between the bond carrying amounts of the two companies would be:

a. Included as a decrease to retained earnings.

b. Included as an increase in retained earnings.

c. Reported as a deferred debit to be amortized over the remaining life of the bonds.

d. Reported as a deferred credit to be amortized over the remaining life of the bonds.

Note: The following information relates to questions 3–6:

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. The bonds have a 10-year maturity from the date of issue and pay interest semiannually.

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.

3. What amount of interest expense does Kruse record for 20X6?

a. $4,777.

b. $4,767.

c. $4,756.

d. $4,805.

4. What amount of interest income does Gary’s Ice Cream Parlors record for 20X6?

a. $4,233.

b. $5,000.

c. $4,145.

d. $6,000.

5. What gain or loss on the retirement of bonds should be reported in the 20X6 consolidated income statement?

a. $2,423 gain.

b. $5,617 gain.

c. $5,408 loss.

d. $8,004 loss.

6. What amount of consolidated net income should be reported for 20X6?

a. $47,253.

b. $54,410.

c. $55,126.

d. $60,256.