Powell Company owns an 80 interest in Sauter Inc On January

Powell Company owns an 80% interest in Sauter, Inc. On January 1, 20X1, Sauter issued $400,000 of 10-year, 12% bonds at a premium of $25,000. On December 31, 20X5, 5 years after original issuance, Powell purchased all of the outstanding bonds for $390,000. Both firms use the straight-line method of amortization.

                  Refer to Powell Company. Bond interest expense included as an adjustment in the 20X5 subsidiary income distribution schedule is ____.

a.

$48,000

b.

$45,500

c.

$47,500

d.

$0

Show computations.

Solution

After 5 years all of the premium of 25000$has been amortized, so the bonds are recorded at par in balance sheet.

Interest expense = 4,00,000*0.12= 48,000$

Which will adjusted as inter company adjustments in consolidated balance sheet.