Company S is an 80%-owned subsidiary of Company P. Company S needed to borrow

$500,000 on January 1, 20X1. The best interest rate it could secure was 10% annual. Company P has a better credit rating and decided to borrow the funds needed from a bank at 8%

annual and then loaned the money to Company S at 9.5% annual.

a. Is Company S better off as a result of borrowing the funds from Company P?

b. What are the interest revenue and expense amounts recorded by Company P and Company S during 20X2?

c. How much interest expense and/or interest revenue should appear in the 20X1 consolidated income statement?

AppendixLO1