Pancake Corporation owns 85 percent of Syrup Corporation's voting shares. On January 1, 20X8, Pancake Corporation sold $200,000 par value 8 percent bonds to Syrup for $245,000. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.

 Pancake Corporation owns 85 percent of Syrup Corporation's voting shares. On January 1, 20X8, Pancake Corporation sold $200,000 par value 8 percent bonds to Syrup for $245,000. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.

Based on the information given above, in the preparation of the 20X8 consolidated financial statements, premium on bonds payable will be:

Multiple Choice

debited for $45,000 in the consolidating entries.


credited for $40,500 in the consolidating entries.


debited for $40,500 in the consolidating entries. Correct

credited for $45,000 in the consolidating entries.

Explanation
The coupon rate each period is 4% (8% ÷ 2). Interest paid each period is $8,000 ($200,000 × 4%). The premium on the sale of the bonds is $45,000. This premium will be amortized straight-line over 20 periods, which equals $2,250 amortization each period. The unamortized premium remaining at December 31, 20X8, is $40,500 ($45,000 − $2,250 − $2,250). In consolidation, the premium is debited to remove the effects of the intercompany debt transfer.