Powell Company owns an 80% interest in Sauter, Inc.On January 1, 2016, Sauter issued $400,000 of 10-year, 12% bonds at a premium of $50,000.On December 31, 2021, 5 years after original issuance, Powell purchased all of the outstanding bonds for $390,000.Both firms use the straight-line method of amortization.
What is the gain on retirement on the 2021 consolidated income statement?

Question

Powell Company owns an 80% interest in Sauter, Inc.On January 1, 2016, Sauter issued $400,000 of 10-year, 12% bonds at a premium of $50,000.On December 31, 2021, 5 years after original issuance, Powell purchased all of the outstanding bonds for $390,000.Both firms use the straight-line method of amortization. ​
What is the gain on retirement on the 2021 consolidated income statement?
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Quizplus · Accepted Answer

The gain on retirement of the bonds in the consolidated income statement is calculated by comparing the carrying amount of the bonds at the time of retirement to the purchase price paid by Powell. Initially, the bonds were issued at a premium ($400,000 + $50,000 = $450,000). Over 5 years, using the straight-line method, the amortization of the premium would be $50,000 / 10 = $5,000 per year, totaling $25,000 over 5 years. Thus, the carrying amount of the bonds at the time of retirement would be $450,000 - $25,000 = $425,000. Powell purchased these bonds for $390,000, resulting in a gain of $425,000 - $390,000 = $35,000. However, since Powell owns 80% of Sauter, the gain recognized in the consolidated income statement would be 80% of $35,000, which is $28,000. The error in the initial calculation means the correct answer isn't directly listed, but the closest to the correct process and outcome based on the provided choices would be recognizing a gain, with the calculation error leading to a reevaluation of the provided options.

Powell Company Owns an 80% Interest in Sauter, Inc