Pal Corporations long-term debt on January 1, 2011, consists of $400,000 par value of 10 percent bonds

Question:

Pal Corporation’s long-term debt on January 1, 2011, consists of $400,000 par value of 10 percent bonds payable due on January 1, 2015, with an unamortized discount of $8,000. On January 2, 2011, Sot Corporation, Pal’s 90 percentowned subsidiary, purchased $80,000 par of Pal’s 10 percent bonds for $76,000. Interest payment dates are January 1 and July 1, and straight-line amortization is used.

1. On the consolidated income statement of Pal Corporation and Subsidiary for 2011, a gain or loss should be reported in the amount of:

a. $5,600 loss

b. $4,000 gain

c. $2,400 gain

d. $2,000 loss

2. Bonds payable of Pal less unamortized discount appears in the consolidated balance sheet at December 31, 2011, in the amount of:

a. $392,000

b. $394,000

c. $320,000

d. $315,200

3. The amount of the constructive gain or loss that is unrecognized on the separate books of Pal and Sot at December31, 2011, is:

a. $2,400

b. $2,200

c. $1,800

d. $0

4. Interest expense on Pal bonds appears in the consolidated income statement for 2011 at:

a. $42,000

b. $40,000

c. $33,600

d. $32,000

5. Consolidated net income for 2012 will be affected by the intercompany bond transactions as follows:

a. Increased by 100% of the constructive gain from 2011

b. Decreased by 25% of the constructive gain from 2011

c. Increased by 25% of the constructive loss from 2011

d. Decreased by (25% × 90%) of the constructive loss from 2011

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