Spice Company issued $200,000 of 10 percent first mortgage bonds on January 1,20X4,at 105.The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.Pumpkin Corporation purchased $140,000 of Spice's bonds from the original purchaser on December 31,20X8,for $125,000.Pumpkin owns 75 percent of Spice's voting common stock.
-Based on the information given above,what amount of gain or loss on bond retirement will be reported in the 20X8 consolidated financial statements?
A)$17,000 loss
B)$12,800 loss
C)$18,500 gain
D)$22,200 gain

Question

Quizplus · Accepted Answer

The gain on bond retirement is calculated as the difference between the carrying amount of the bonds and the purchase price. The carrying amount of the bonds is $140,000 (face value) plus the premium amortized over 10 years. Since the bonds were issued at 105, the premium is $7,000 ($140,000 * 5%). Over 5 years, half of this premium would be amortized, leaving $3,500. Thus, the carrying amount is $140,000 + $3,500 = $143,500. The purchase price is $125,000, resulting in a gain of $143,500 - $125,000 = $18,500.

Spice Company Issued $200,000 of 10 Percent First Mortgage Bonds