REFERENCE: Ref.06_02 Stoop Co.owned 80% of the Common Stock of Knight Co.Knight

Multiple Choice

REFERENCE: Ref.06_02
Stoop Co.owned 80% of the common stock of Knight Co.Knight had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding.Each preferred share received an annual per share dividend of $10 and is convertible into four shares of common stock.Stoop did not own any of Knight's preferred stock.Knight also had 600 bonds outstanding,each of which is convertible into ten shares of common stock.Knight's annual after-tax interest expense for the bonds was $22,000.Stoop did not own any of Knight's bonds.Knight reported income of $300,000 for 2009.
-Vontkins Inc.owned all of Quasimota Co.The subsidiary had bonds payable outstanding on January 1,2009,with a book value of $265,000.The parent acquired the bonds on that date for $288,000.Subsequently,Vontkins reported interest income of $25,000 in 2009 while Quasimota reported interest expense of $29,000.Consolidated financial statements were prepared for 2010.What adjustment would have been required for the retained earnings balance as of January 1,2010?

A) reduction of $27,000.
B) reduction of $4,000.
C) reduction of $19,000.
D) reduction of $30,000.
E) reduction of $20,000.