Pallet Corporation owns 90% of the outstanding common stock of Stealth Company. On January 1, 2014, Stealth Company issued $500,000, 12%, ten-year bonds. On January 1, 2016, Pallet Corporation paid $412,000 for Stealth Company bonds with a par value of $400,000 and a carrying value of $393,600. Both companies use the straight-line method to amortize bond premiums and discounts. Pallet Corporation accounts for the investment using the cost method of accounting.
The total gain or loss on the constructive retirement of the debt to be reported in the 2016 consolidated income statement is

Question

Quizplus · Accepted Answer

The total gain or loss on the constructive retirement of the debt is calculated as the difference between the carrying amount of the bonds and the amount paid by Pallet Corporation. The carrying amount of the bonds was $393,600, and Pallet Corporation paid $412,000. Therefore, the loss is $412,000 - $393,600 = $18,400. This loss is reported in the consolidated income statement.

Pallet Corporation Owns 90% of the Outstanding Common Stock of Stealth