Duncan Inc. owned all of the outstanding stock of Brandt Co. The subsidiary had bonds payable outstanding on January 1, 2020, with a book value of $270,000. The parent acquired the bonds on that date for $291,000. Subsequently, Duncan reported interest income of $26,000 in 2020 while Brandt reported interest expense of $31,000. Consolidated financial statements were prepared for 2021. What adjustment would be required for the retained earnings balance as of January 1, 2021?

A) Reduction of $5,000.
B) Reduction of $16,000.
C) Reduction of $26,000.
D) Reduction of $31,000.
E) Reduction of $57,000.

Question

Cynthia Keavney · Accepted Answer

Final Answer : B, Explanation :  The adjustment required is the difference between the interest income reported by Duncan ($26,000) and the interest expense reported by Brandt ($31,000), which is $5,000. Additionally, the premium paid on the bonds ($291,000 - $270,000 = $21,000) must be amortized. The total adjustment is $5,000 + $21,000 = $26,000, but since the question asks for the adjustment to retained earnings, we consider the net effect of the interest and premium, which is a reduction of $16,000.

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