Paper Corporation holds 80 percent of the voting shares of Scissor Company.On January 1,20X8,Scissor purchased $100,000 par value 12 percent first mortgage bonds of Paper from Cruse for $115,000.Paper originally issued the bonds to Cruse on January 1,20X6,for $110,000.The bonds have an 8-year maturity from the date of issue.Scissor's reported net income of $65,000 for 20X8,and Paper reported income (excluding income from ownership of Scissor's stock)of $90,000.
-Based on the information given above,what gain or loss on the retirement of bonds should be reported in the 20X8 consolidated income statement?
A)$6,250 gain
B)$7,500 gain
C)$7,500 loss
D)$6,250 loss

Question

Quizplus · Accepted Answer

Since Scissor Company is a subsidiary of Paper Corporation, the intercompany transaction between Paper and Scissor needs to be eliminated in the consolidation process. Scissor's purchase of Paper's bonds should be eliminated against Paper's issuance of the bond, resulting in no gain or loss recognized in the consolidated financial statements. However, since Scissor has received interest income from the bonds in the amount of $12,000 (12% x $100,000), which needs to be eliminated against Paper's interest expense ($12,000), resulting in a reduction of Paper's net income by $12,000. Therefore, the consolidated net income is $143,000 ($65,000 + $90,000 - $12,000). Since the elimination of the intercompany transaction did not result in any gain or loss, choices (A) and (B) can be eliminated. The consolidated income statement does not show a gain or loss on the bond retirement, so choice (D) is also incorrect. The correct choice is (C) $7,500 loss, which represents the elimination of Paper's interest expense to Scissor's interest income.

Paper Corporation Holds 80 Percent of the Voting Shares of Scissor