Question

On January 1, 20X6, Pepper Corporation issued 10-year bonds at par to unrelated parties. The bonds have a 10% stated rate, face value of $300,000, and pay interest every June 30 and December 31. On December 31, 20X9, Salt Corporation purchased all of Pepper's bonds in the open market at a $6,000 discount. Salt is Pepper's 80 percent owned subsidiary. Salt uses the effective interest method of amortization. The consolidated income statement for the year 20X9 should report with respect to the bonds: I. interest expense of $30,000. II. a gain of $6,000.

Answer 1

I. interest expense of $30,000

Step-by-step explanation:

Since in the question it is mentioned that the face value is $300,000 and the rate of interest is 10%

So, the interest expense is

= $300,000 × 10%

= $30,000

Now the same would be presented in the consolidated income statement

Hence, the correct option is I

Also the gain would not be considered