Company S is an 80%-owned subsidiary of Company P. Company S needed to borrow $500,000 on January 1, 2011. 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 2012?
c. How much interest expense and/or interest revenue should appear on the 2011 consolidated income statement?

  • CreatedApril 13, 2015
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