Powell Company owns an 80% interest in Sauter, Inc. On January 1, 20X1, Sauter issued $400,000 of 10-year, 12% bonds at a premium of $25,000. On December 31, 20X5, 5 years after original issuance, Powell purchased all of the outstanding bonds for $390,000. Both firms use the straight-line method of amortization.
-Refer to Powell Company. What is the gain on retirement on the 20X5 consolidated income statement?

Question

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The carrying amount of the bonds on December 31, 20X5, would be $375,000 (the $400,000 face value minus $25,000 of unamortized premium). Powell purchased the bonds for $390,000, resulting in a gain of $15,000 ($390,000 - $375,000). Since Powell owns an 80% interest in Sauter, the consolidated gain on retirement of bonds would be $12,000 ($15,000 x 0.8 = $12,000). However, the question asks for the gain on the consolidated income statement, which would be reduced by the portion of the gain that belongs to the noncontrolling interest (20%). Therefore, the answer is $22,500 ($12,000 ÷ 0.8 = $15,000 x 1.5 = $22,500).

Powell Company Owns an 80% Interest in Sauter, Inc