Question

Prince Company acquires Duchess, Inc. on January 1, 2016. At the date of acquisition, Duchess has long-term debt with a fair value of $1,500,000 and a carrying amount of $1,200,000.

With respect to long-term debt consolidation worksheet adjustments in periods following the acquisition, which of the following is correct:

Multiple Choice:

Debit Interest Expense and Credit Long-Term Debt Expense.

Prince must recognize an increase in interest expense if the amount is material.

Do not adjust the value of the debt because Prince is not obligated to repay the debt.

Credit Long-Term Debt and Debit Interest Expense on the balance sheet of Duchess.

Debit Long-Term Debt and Credit Interest Expense.

Answer 1

Debit Interest Expense and Credit Long-term Debt Expense.

Step-by-step explanation:

When Price is acquiring the Duchess Incorporation, it is agreeing upon everything that the Duchess is liable to pay and and receive from any other party. Duchess has a long term debt with a fair value of $1500000, which needs to be paid by the acquiring company now i.e. Prince. Hence, the interest expense would be paid and the long-term debt expense would be decreased by the same amount.

Therefore, for that the entries would be as follows:

Debit Credit

Interest Expense $xxx

Long-term debt expense $xxx