Paper Corporation holds 80 percent of the voting shares of Scissor Company.On January 1,20X8,Scissor purchased $100,000 par value 12 percent Paper bonds from Cruse Corporation for $115,000.Paper originally issued the bonds to Cruse on January 1,20X6,for $110,000.The bonds have an 8-year maturity from the date of issue and pay interest semiannually on June 30 and December 31 each year.Scissor' reported net income of $65,000 for 20X8,and Paper reported income (excluding income from ownership of Scissor's stock)of $90,000.Paper's partial bond amortization schedule is as follows:

-Based on the information given above,what gain or loss on the retirement of bonds should be reported in the 20X8 consolidated income statement?

Question

Paper Corporation holds 80 percent of the voting shares of Scissor Company.On January 1,20X8,Scissor purchased $100,000 par value 12 percent Paper bonds from Cruse Corporation for $115,000.Paper originally issued the bonds to Cruse on January 1,20X6,for $110,000.The bonds have an 8-year maturity from the date of issue and pay interest semiannually on June 30 and December 31 each year.Scissor' reported net income of $65,000 for 20X8,and Paper reported income (excluding income from ownership of Scissor's stock)of $90,000.Paper's partial bond amortization schedule is as follows:
 
-Based on the information given above,what gain or loss on the retirement of bonds should be reported in the 20X8 consolidated income statement?

Quizplus · Accepted Answer

Since Paper holds 80% of the voting shares of Scissor, Scissor is considered a subsidiary of Paper, and these two companies are consolidated for financial reporting purposes. When Scissor purchases the bonds from Cruse, the bonds are considered outstanding within the consolidated entity, and any gain or loss on retirement is recognized in the consolidated income statement.

To calculate the gain or loss on retirement, we need to determine the carrying value of the bonds at the time of the retirement. Since the bonds were purchased for $115,000, and the remaining unamortized premium on the bonds at the end of 20X8 was $1,813, the carrying value of the bonds was $113,813.

On December 31, 20X8, Scissor retires the bonds for $100,000, resulting in a loss of $13,813 ($113,813 - $100,000) on retirement. This loss is recognized in the consolidated income statement for 20X8.

Therefore, the correct answer is C) $6,813 loss, as the loss is recognized on a consolidated basis, and the consolidated net income is the sum of Paper and Scissor's individual net incomes minus the loss on bond retirement.

Paper Corporation Holds 80 Percent of the Voting Shares of Scissor