Pat Corporation owns a 70 percent interest in Son Corporation acquired several years ago at book value equal to fair value. On January 1, 2011, Son had outstanding $1,000,000 of 9 percent bonds with a book value of $990,000. On January 2, 2011, Pat purchased $500,000 of Son’s 9 percent bonds for $503,000. The bonds are due on January 1, 2015, and pay interest on January 1 and July 1.

REQUIRED

1. Determine the gain or loss on the constructive retirement of Son’s bonds.

2. Son reports net income of $14,000 for 2011. Determine Pat’s income from Son.