Final answer:
The consolidated interest expense reported for the 20X4 income statement is $25,600, which includes interest paid to nonaffiliates and the portion of interest paid by Purse Corporation not eliminated in consolidation.
Step-by-step explanation:
To determine the interest expense for the 20X4 consolidated income statement, we must first calculate the total interest paid on the bonds issued by Scarf Company. Since the bonds have an 8 percent annual interest rate and interest is paid semiannually, each installment is 4 percent of the par value. Purse Corporation owns $400,000 of the par value, so the interest paid by Purse every six months is $16,000 (which is 4% of $400,000). Over one year, this amounts to $32,000. Considering Purse Corporation's 70% ownership of Scarf Company, the interest expense reported in the consolidated statement will only reflect the portion that is considered external to the firm's economic entity. Therefore, we need to adjust for the intercompany interest, which is 70% of the $32,000 paid by Purse. This intercompany interest is $22,400 (70% of $32,000). The remaining bonds held by nonaffiliates have a par value of $200,000, resulting in annual interest payments of $16,000. Summing the external interest and adjusting for the intercompany payments gives us the consolidated interest expense: $16,000 (nonaffiliate interest) + $9,600 (30% of Purse's interest), for a total of $25,600.
The interest expense to be reported in the 20X4 consolidated income statement is $25,600.