Question

Purse corporation owns 70 percent of Scarf company’s voting shares. On January 1, 20x3, Scarf sold bonds with a par value of $682,500 at 98. Purse purchased $455,000 par value of the bonds; the remainder was sold to nonaffiliates. The bonds mature in five years and pay an annual interest rate of 8 percent. Interest is paid semiannually on January 1 and July 1. Required: a. What amount of interest expense should be reported in the 20x4 consolidated income statement? A. $36,500 B. $45,000 C. $47,800 D. $52,000

Answer 1

To calculate the interest expense in the 20x4 consolidated income statement, you need to determine the portion of the bonds owned by Purse corporation and calculate the interest based on that.

Step-by-step explanation:

To calculate the amount of interest expense reported in the 20x4 consolidated income statement, we need to determine the portion of the bonds owned by Purse corporation. Purse purchased $455,000 par value of the bonds, which is 70% of the total voting shares. Therefore, we can calculate the interest expense as follows:

1. Calculate the total interest expense by multiplying the par value of the bonds ($682,500) by the annual interest rate (8%) to get $54,600.
2. Calculate the portion of interest expense that should be reported by Purse corporation by multiplying the total interest expense by the percentage of bonds owned by Purse (70%) to get $38,220.

Therefore, the amount of interest expense reported in the 20x4 consolidated income statement should be $38,220, which is option A.