Interest Income and Expense
Snerd Corporation’s controller is having difficulty explaining the impact of several of the company’s intercorporate bond transactions.
Required
a. Snerd receives interest payments in excess of the amount of interest income it records on its investment in Snort bonds. Did Snerd purchase the bonds at par value, at a premium, or at a discount? How can you tell?
b. The 20X3 consolidated income statement reported a gain on the retirement of a subsidiary’s bonds. If Snerd purchased the bonds from a nonaffiliate at par value:
(1) Were the subsidiary’s bonds originally sold at a premium or a discount? How can you tell?
(2) Will the annual interest payments received by Snerd be more or less than the interest expense recorded by the subsidiary? Explain.
(3) How is the difference between the interest income recorded by Snerd and the interest expense recorded by the subsidiary treated in preparing consolidated financial statements at the end of each period?