Question

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.
The bonds are accounted for using straight-line amortization of premiums and discounts. Gary's reported net income of $20,000 for and Kruse reported income (excluding income from ownership of Gary's
stock) of $40,000.

Required:
Select the correct answer for each of the following questions.
1. What amount of interest expense does Kruse record 20X6?
a. $4,000.
b. $4,700.
c. $5,000.
d. $10,000.

2. What amount of interest income does Gary's Ice Cream Parlors record for
a. $4,000.
b. $5,000.
c. $9,000.
d. $10,000.

3. What gain or loss on the retirement of bonds should be reported in the 20X6 consolidated income statement?
a. $2,400 gain.
b. S5,600 gain.
c. $5,600 loss.
d. S8,000 loss.

4. What amount of consolidated net income should be reported for 20X6?
a. $47,100.
b. $4,400.
c. $55,100.
d. S60,000.

Answer 1

Answer:

Explanation:

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

Interest expense = [$50,000*10% - ($3000/10 years)] = $4,700

Option B

2. What amount of interest income does Gary's Ice Cream Parlors record for

Interest income = [$50,000*10% - (8000/10 years)] = $4,000

Option A

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

Gain or loss = [$58,000 - ($53,000 - ($3,000*10 years)*2years)] = - $5,600

Option C

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

Operating income $40,000

Gary's net income $20,000

Less: Loss on retirement of bonds ($5,600)

Recognition during 20x5 ($4,700-$4000) $700

Net income $55,100

Option C