Use the following information to answer the question(s) below.

Pascalian Company owns a 90% interest in Sapp Company. On January 1, 2013, Pascalian had $300,000, 6% bonds outstanding with an unamortized premium of $9,000. The bonds mature on December 31, 2017. Sapp acquired one-third of Pascalian's bonds in the open market for $97,000 on January 1, 2013. Both companies use straight-line amortization of bond discounts/premiums. Interest is paid on December 31. On December 31, 2013, the books of the two affiliates held the following balances:
$$\begin{array} { l l }
6 \% \text { bonds payable } & \$ 300,000 \
\text { Premium on bonds } & 7,200 \
\text { Interest expense } & 16,200
\end{array}$$ $$\begin{array} { l l }
\text { Investment in Pascalian bonds } & \$ 97,600 \
\text { Interst income } & 6,600
\end{array}$$
-Prussia Corporation owns 80% of the voting stock of Stad Corporation.On January 1,2013,Prussia paid $391,000 cash for $400,000 par of Stad's 10% $1,000,000 par value outstanding bonds,due on April 1,2018.Stad's bonds had a book value of $1,045,000 on January 1,2013.Straight-line amortization is used.The gain or loss on the constructive retirement of $400,000 of Stad bonds on January 1,2013 was reported in the 2013 consolidated income statement in the amount of

Question

Use the following information to answer the question(s) below.

Pascalian Company owns a 90% interest in Sapp Company. On January 1, 2013, Pascalian had $300,000, 6% bonds outstanding with an unamortized premium of $9,000. The bonds mature on December 31, 2017. Sapp acquired one-third of Pascalian's bonds in the open market for $97,000 on January 1, 2013. Both companies use straight-line amortization of bond discounts/premiums. Interest is paid on December 31. On December 31, 2013, the books of the two affiliates held the following balances:
$$\begin{array} { l l } 
6 \% \text { bonds payable } & \$ 300,000 \
\text { Premium on bonds } & 7,200 \
\text { Interest expense } & 16,200
\end{array}$$ $$\begin{array} { l l } 
\text { Investment in Pascalian bonds } & \$ 97,600 \
\text { Interst income } & 6,600
\end{array}$$
-Prussia Corporation owns 80% of the voting stock of Stad Corporation.On January 1,2013,Prussia paid $391,000 cash for $400,000 par of Stad's 10% $1,000,000 par value outstanding bonds,due on April 1,2018.Stad's bonds had a book value of $1,045,000 on January 1,2013.Straight-line amortization is used.The gain or loss on the constructive retirement of $400,000 of Stad bonds on January 1,2013 was reported in the 2013 consolidated income statement in the amount of

Quizplus · Accepted Answer

The gain on the constructive retirement of the bonds is calculated by comparing the carrying amount of the bonds to the amount paid by the parent company. The carrying amount is the par value plus unamortized premium or minus unamortized discount. In this case, Stad's bonds had a book value of $1,045,000 for the total $1,000,000 par value bonds, indicating a $45,000 premium. The portion related to the $400,000 of bonds is ($45,000 / $1,000,000) * $400,000 = $18,000. Therefore, the carrying amount of the $400,000 of bonds is $400,000 + $18,000 = $418,000. Prussia paid $391,000, resulting in a gain of $418,000 - $391,000 = $27,000. However, since Prussia owns 80% of Stad, the gain recognized in the consolidated income statement is 80% of $27,000, which is $21,600.