E 7-10Constructive retirement of parent's bondsPad Corporation has $4,000,000 of 12 percent bonds outstanding on December 31, 2011, with unamortized premiumof $120,000. These bonds pay interest semiannually on July 1 and January 1 and mature on January 1, 2017.On January 2, 2012, Sal Corporation, an 80 percent-owned subsidiary of Pad, purchases $1,000,000 par of Pad'soutstanding bonds in the market for $980,000.ADDITIONAL INFORMATION1. Pad and Sal use the straight-line method of amortization.2. The financial statements are consolidated.3. Pad's bonds are the only outstanding bonds of the affiliated companies.4. Sal's net income for 2012 is $400,000 and for 2013, $600,000.

For number one, how do you get 25% to calculate the bookvalue of bonds purchased by Sal?

The answer is $50.

Book value of bonds purchased by Sal ($4m +125k) x 25% = $1,030

Priced paid by Sal = $980

Gain from constructive retirement of bonds =$50