Question

On January 1, 20X6, Nichols 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, Harn Corporation purchased all of Nichols' bonds in the open market at a $6,000 discount. Harn is Nichols' 80 percent owned subsidiary. Harn 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
a. I and II
b. II but not I
c. Either I or II
d. Neither I nor II

Answer 1

a. I and II

Step-by-step explanation:

As there is an interest expense of $30,000 i.e come from

= $300,000 ×10%

= $30,000

This would be reflected on the consolidated income statement for the year 20X6. And the extraordinary gain which generally disclosed to the financial statement notes

Therefore in the given situation it is being considered as only a gain, not as an extraordinary gain

Hence, both the amounts i.e interest expense and the gain will be reported in consolidated income statement for the year 20X6