Pebble Beach Inc. owns 80% of the common shares of Skokie Corp. On January 1, 2018, Pebble
Question:
Pebble Beach Inc. owns 80% of the common shares of Skokie Corp. On January 1, 2018, Pebble Beach issued bonds with a par value of $410,000 which will mature on January 1, 2023. The bonds bear interest at an annual rate of 9%, with annual interest payments made each December 31st. At the date of issue of the bonds, Pebble Beach received proceeds of $400,000.
On January 1, 2020, Skokie purchased 60% of Pebble Beach’s bonds on the open market for $225,000. Both companies use the effective interest method. Both companies have a December 31st year- end and pay income taxes at a rate of 40%.
Bond gains and losses are to be allocated to each company. During 2020,
Skokie earned a net income of $80,000 and paid dividends of $20,000. Market rates (Yield) for these bonds was 8.45% at issue date January 1, 2018 for Pebble Beach. Market rate (Yield) for Skokie at investment date January 1, 2020 was 10.45%
REQUIRED:
a) Calculate the amount of the gain or loss that will appear as a separate item on the 2020 consolidated income statement, as a result of the bond transaction. (2 marks)
b) Calculate the after-tax gain or loss to Skokie on the purchase of the Bonds. (2 marks)
c) Calculate the after-tax gain or loss to Pebble Beach on the purchase of the Bonds. (2 marks)
d) What amount of after-tax interest expense (if any) would have to be eliminated in 2020 as a result of the purchase of the Bonds? (3 marks)
e) Calculate the non-controlling interest’s share of Skokie’s income for the year-ended December 31, 2020. (3 marks)
f) What value would be shown on Pebble Beach’s December 31, 2020 Consolidated Balance Sheet for the Bond issue? (3 marks)
Survey of Accounting
ISBN: 978-1259631122
5th edition
Authors: Thomas Edmonds, Christopher Edmonds, Philip Olds, Frances McNair, Bor-Yi Tsay