Several years ago, Pappy Company acquired 80% of the outstanding shares of Sunny Company, at a cost

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Question:

Several years ago, Pappy Company acquired 80% of the outstanding shares of Sunny Company, at a cost equal to Sunny’s book value at the time.

On January 1, 2005, Sunny issued 10-year corporate bonds with a maturity amount of $8,000,000. These bonds have an 8% face interest rate and pay interest annually on January 1. The total amount received by Sunny when the bonds were issued was $8,400,000.

On April 1, 2008, Pappy purchased Sunny bonds with a $2,000,000 maturity amount, paying $1,784,000 plus accrued interest.

For 2008, Sunny reported Net Income of $400,000 and declared and paid dividends of $200,000. For 2008, Pappy had net earnings from its own operations (not including Income from Sunny) of $800,000 and declared and paid dividends to $350,000.

Both Pappy and Sunny use straight-line amortization of bond premium and discount. Pappy records Bond Investments net of discount or premium. Sunny shows a separate Discount or Premium ledger account.

REQUIRED

A. Determine the amount that would be reported on Pappy’s and Sunny’s Individual Financial Statements as of December 31, 2008, (that is, the amounts recorded on Pappy’s and Sunny’s books), and on the Consolidated Financial Statements as of December 31, 2008 for each of the following:

B. Determine the amount that would appear on the 2009 Consolidated Income statement for:

Gain on bonds, Loss on Bonds, Interest Expense, and Interest Revenue.