Hunter Corporation holds 80 percent of the voting shares of Moss Company.On January 1,2008,Moss purchased $100,000 par value 12 percent first mortgage bonds of Hunter from Cruse for $115,000.Hunter originally issued the bonds to Cruse on January 1,2006,for $110,000.The bonds have a 8-year maturity from the date of issue.Moss' reported net income of $65,000 for 2008,and Hunter reported income (excluding income from ownership of Moss'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 2008 consolidated income statement?

Question

Quizplus · Accepted Answer

The gain or loss on the retirement of bonds is calculated by taking the carrying value of the bonds (the original cost plus any accrued interest) and comparing it to the amount paid to retire the bonds. In this case, the carrying value of the bonds on January 1, 2008 would be $127,360 ($110,000 + 2 years of accrued interest at 12%). Moss purchased the bonds for $115,000, which results in a loss of $12,360. Since Hunter owns 80% of Moss, the loss needs to be adjusted for the noncontrolling interest of 20%, resulting in a consolidated loss of $9,888 ($12,360 x 80%). However, this loss should be allocated between Hunter and Moss based on their ownership interests in the bonds. Since Hunter originally issued the bonds and still holds 20% of the outstanding bonds, they should take 20% of the loss, or $1,977. Moss should take the remaining 80% of the loss, or $7,911. Therefore, the consolidated income statement should report a loss on the retirement of bonds of $7,911.

Hunter Corporation Holds 80 Percent of the Voting Shares of Moss