Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1,2004,at 105.The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1,2008,for $122,000.Mortar owns 75 percent of Granite's voting common stock.
-Based on the information given above,what amount of gain or loss on bond retirement will be reported in the 2008 consolidated financial statements?

Question

Quizplus · Accepted Answer

- The face value of the bonds is $200,000 ($140,000 purchased by Mortar + $60,000 still held by the original purchaser).
- The carrying value of the bonds on January 1, 2008, is the original issuance price of $210,000 ($200,000 x 105%) minus 4 years of amortization (10-year maturity - 4 years elapsed = 6 years remaining; 6 x 2 semiannual periods per year = 12 periods; $10,000 annual interest expense / 2 = $5,000 semiannual interest expense; $5,000 x 12 periods = $60,000 amortization).
- The original purchaser sold the bonds to Mortar for $122,000, which is less than the carrying value of $150,000 ($210,000 - $60,000 amortization). Therefore, a loss on bond retirement will be recognized for the difference of $28,000 ($150,000 - $122,000).
- Since Mortar owns 75% of Granite's voting common stock, the loss will be allocated to Granite's noncontrolling interest. Therefore, the loss on bond retirement to be reported in the consolidated financial statements is $22,200 ($28,000 x 25%).

Granite Company Issued $200,000 of 10 Percent First Mortgage Bonds