Question

Kruse Corporation holds 60 percent of the voting common shares of Gary’s Ice Cream Parlors. On January 1, 20X6, Gary’s purchased $50,000 par value, 10 percent first mortgage bonds of Kruse from Cane for $58,000. Kruse originally issued the bonds to Cane on January 1, 20X4, for $53,000 (assuming a market interest rate of 9.074505 percent). The bonds have a 10-year maturity from the date of issue and pay interest semiannually on June 30th and December 31st.

The bonds are accounted for using straight-line amortization of premiums and discounts. Gary's reported net income of $20,000 for and Kruse reported income (excluding income from ownership of Gary's
stock) of $40,000.

Required:
Select the correct answer for each of the following questions.
1. What amount of interest expense does Kruse record 20X6?
a. $4,000.
b. $4,700.
c. $5,000.
d. $10,000.

2. What amount of interest income does Gary's Ice Cream Parlors record for
a. $4,000.
b. $5,000.
c. $9,000.
d. $10,000.

3. What gain or loss on the retirement of bonds should be reported in the 20X6 consolidated income statement?
a. $2,400 gain.
b. S5,600 gain.
c. $5,600 loss.
d. S8,000 loss.

4. What amount of consolidated net income should be reported for 20X6?
a. $47,100.
b. $4,400.
c. $55,100.
d. S60,000.

Answer 1

Answer:

Explanation:

1. What amount of interest expense does Kruse record 20X6?

Interest expense = [$50,000*10% - ($3000/10 years)] = $4,700

Option B

2. What amount of interest income does Gary's Ice Cream Parlors record for

Interest income = [$50,000*10% - (8000/10 years)] = $4,000

Option A

3. What gain or loss on the retirement of bonds should be reported in the 20X6 consolidated income statement?

Gain or loss = [$58,000 - ($53,000 - ($3,000*10 years)*2years)] = - $5,600

Option C

4. What amount of consolidated net income should be reported for 20X6?

Operating income $40,000

Gary's net income $20,000

Less: Loss on retirement of bonds ($5,600)

Recognition during 20x5 ($4,700-$4000) $700

Net income $55,100

Option C

Answer 2

Bonds are termed as the securities that are exchanged with the parties in order to raise finance or raise capital for the growth of the firm or its expansion.

The answer of the various sub-parts of the context are:

1. The amount of interest expense is $4,700.

2. The amount of interest income is $4,000

3. The loss that will be reported on the retirement of the bonds is $5,600 loss.

4. The amount of consolidated net income is $55,100.

Computation of the various sun parts of the context are:

1.

$\text{ Interest expense} = (\text{Price of the Bond} \times interest) -\dfrac{\text{extra bond issued} }{\text{no. of years}}\\\\\text{ Interest expense} = \ 50,000\times10\% - \dfrac{\ 3000}{\/10\:\rm years}\\\\ \text{ Interest expense}= \ 4,700$

2. $\text{ Interest expense} = (\text{Price of the Bond} \times interest) -\dfrac{\text{extra bond issued} }{\text{no. of years}}\\\\\text{ Interest expense} = \ 50,000\times10\% - \dfrac{\ 8000}{\/10\:\rm years}\\\\ \text{ Interest expense}= \ 4,000$

3. $\rm Gain\;or\;loss=1st\;issud\;bond\;-\;issud\;bond\;of\;20x4-extra\;issued\;bond\;\times\;no.\;of\;years\;\times\;number\;of\;years\\\\\begin{aligned}\text{Gain or loss} &= [\ 58,000 - (\ 53,000 - (\ 3,000\times10 \;\text{years})\times\text{2 years})]\\\\\text{Gain or loss} &= - \ 5,600 \end{aligned}$

4. Operating income $40,000

Gary's net income $20,000

Less: Loss on retirement of bonds ($5,600)

$\text{Recognition during 20x5} = \text{Interest expense} - \text{Interest income}\\\\\text{Recognition during 20x5} = (\ 4,700-\ 4000)\\\\\text{Recognition during 20x5} = \ 700\\\\\text{Net income} = \ 55,100$

Learn more about the computation of the sub-parts here:

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