Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105....

Question:

Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock.

Based on the information given, what amount of premium on bonds payable will be eliminated in the preparation of the 20X8 consolidated financial statements?

a. $3,500

b. $2,800

c. $5,000

d. $2,500

Intercompany Transactions

When companies merged or enter into business combination, they are prohibited from engaging into transactions with each other. If that happens, eliminations of transaction must be made first before it will be consolidated.

Answer and Explanation:

1. A.) $3,500

Premium on bonds payable = 140,000 * 5% = 7,000

Amortization of Premium = 7,000 / 20 * 10 = 3,500

Unamortized Premium = 3,500