Pacman Company issued 5-year, 8% bonds with a par value of $100,000 on December 31, 2009, for $92,278 (sold to yield 10%). Interest is paid semiannually on June 30th and
December 31st. On December 31, 2010, $80,000 of the par value bonds were purchased by Space Invaders Company for $77,362 (a 9% yield). Space Invaders Company is a 70%-owned ubsidiary of Pacman Company. Both companies use the effective interest method to amortize bond discounts and premiums. Space Invaders Company declared cash dividends of $60,000 each year during the period 2010–2011.
(round answers to the nearest dollar)
A. Compute the total gain or loss on the constructive retirement of debt.
B. Allocate the total gain or loss between Pacman Company and Space Invaders Company.
C. Prepare the book entries related to the bonds made by the individual companies during
2011. (Hint: It will be helpful to prepare bond amortization schedules. Tables of Present
Value factors are presented in Appendix PV at the back of the book.)
D. Assume that the two companies reported net income as follows: