Paulina, Incorporated, owns 90 percent of Southport Company. On January 1, 2024, Paulina acquires half of Southport’s $500,000 outstanding 13-year bonds. These bonds had been sold on the open market on January 1, 2021, at a 12 percent effective rate. The bonds pay a cash interest rate of 10 percent every December 31 and are scheduled to come due on December 31, 2033. Southport issued this debt originally for $435,765. Paulina paid $283,550 for this investment, indicating an 8 percent effective yield.
a. Assuming that both parties use the effective rate method, what gain or loss from the retirement of this debt should be reported on the consolidated income statement for 2023?
b. Assuming that both parties use the effective rate method, what balances should appear in the Investment in Southport Bonds account on Paulina’s records and the Bonds Payable account of Southport as of December 31, 2024?
c. Assuming that both parties use the straight-line method, what consolidation entry would be required on December 31, 2024, because of these bonds? Assume that the parent is not applying the equity method.