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. The bonds have a 10-year maturity from the date of issue and pay interest semiannually. The bonds are accounted for using straight-line amortization of premiums and discounts

 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. The bonds have a 10-year maturity from the date of issue and pay interest semiannually. The bonds are accounted for using straight-line amortization of premiums and discounts.

Gary’s reported net income of $20,000 for 20X6, and Kruse reported income (excluding income from ownership of Gary’s stock) of $40,000.

Select the correct answer for each of the following questions.

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

Multiple Choice

$10,000


$5,000


$4,700 Correct

$4,000

Explanation
$4,700 = ($50,000 × 0.10) − ($3,000 / 10 years)

 

Required:
2. What amount of interest income does Gary’s Ice Cream Parlors record for 20X6?

Multiple Choice

$10,000


$5,000


$4,000 Correct

$9,000

Explanation
$4,000 = ($50,000 × 0.10) − ($8,000 / 8 years)