Pepper Ltd. (Pepper) owns 75% of Sage Corp. (Sage) and uses the equity method to account for its investment.
Pepper has a $240,0000 bond issue outstanding that pays 12% interest annually. Interest payment dates are June 30 and December 31 each year. The bonds were originally issued at a discount. The unamortized bond discount is $20,000. The bonds mature on January 1, 2033.
On January 1, 2023, Sage purchased $120,000 par value, 12% bonds for $100,000.
Straight line amortization is used to amortize the discount.
Both companies have a December 31 year end. Intercompany bond gains and losses are to be allocated to each company. During 2023, Sage earned a net income of $80,000 and paid dividends of $20,000.

Estimate the correct pre-tax gain or loss to Sage on the intercompany purchase of the bonds?

Answer rating: 100% (QA)

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