Select the correct answer for each of the following questions.

1. [AICPA Adapted] Wagner, a holder of a \(\$ 1,000,000\) Palmer Inc. bond, collected the interest due on March 31, 20X8, and then sold the bond to Seal Inc. for \(\$ 975.000\). On that date. Palmer, a 75 percent owner of Seal, had a \(\$ 1,075,000\) carrying amount for this bond. What was the effect of Seal's purchase of Palmer's bond on the retained earnings and minority interest amounts reported in Palmer's March 31, 20X8, consolidated balance sheet?

2. [AICPA Adapted] P Company purchased term bonds at a premium on the open market. These bonds represented 20 percent of the outstanding class of bonds issued at a discount by S Company, P's wholly owned subsidiary. P intends to hold the bonds to maturity. In a consolidated balance sheet, the difference between the bond carrying amounts of the two companies would be:

a. Included as a decrease to retained earnings.

b. Included as an increase in retained eamings.

c. Reported as a deferred debit to be amortized over the remaining life of the bonds.

d. Reported as a deferred credit to be amortized over the remaining life of the bonds.
This information relates to questions 3-6.
Kruse Corporation holds 60 percent of the voting common shares of Gary's Ice Cream Parlors. On January 1, 20X6, Gary's Ice Cream Parlors purchased \(\$ 50,000\) par value, 10 percent, first mortgage bonds of Kruse Corporation from Cane Corporation for \(\$ 58.000\). Kruse Corporation originally issued the bonds to Cane Corporation on January 1, 20X4, for \(\$ 53,000\). The bonds have a 10 -year maturity from the date of issue.
Gary's Ice Cream Parlors reported net income of \(\$ 20,000\) for 20X6, and Kruse Corporation reported income (excluding income from ownership of Gary's Ice Cream Parlors stock) of \(\$ 40,000\).
3. What amount of interest expense is recorded annually by Kruse Corporation?

a. \(\$ 4,000\).

b. \(\$ 4,700\).

c. \(\$ 5,000\).

d. \(\$ 10,000\).
4. What amount of interest income is recorded by Gary's Ice Cream Parlors for 20X6?

a. \(\$ 4,000\).

b. \(\$ 5,000\).

c. \(\$ 9,000\).

d. \(\$ 10,000\).
5. What gain or loss on the retirement of bonds should be reported in the 20X6 consolidated income statement?

a. \(\$ 2,400\) gain.

b. \(\$ 5,600\) gain.

c. \(\$ 5,600\) loss.

d. \(\$ 8,000\) loss.
6. What amount of consolidated net income should be reported for 20X6?

a. \(\$ 47,100\).

b. \(\$ 52,000\).

c. \(\$ 54,400\).

d. \(\$ 60,000\).

Transcribed Image Text:

Retained Earnings a. $100,000 increase b. $75,000 increase c. No effect d. No effect Minority Interest No effect $25,000 increase $25,000 increase $100,000 increase