Computing the Constructive Gain or Loss on Retirement of Debt
Pacelli Company issued 10-year, 10% bonds with a par value of $1,000,000 on January 2, 2010, for $940,000. Interest is paid semiannually on June 30 and December 31. On December 31, 2011, $800,000 of the par value bonds were purchased by Salez Company for $820,000. Salez Company is an 80%-owned subsidiary of Pacelli Company. Both companies use the straight-line method to amortize bond discounts and premiums.
Salez Company declared cash dividends of $60,000 each year during the period 2011–2012.
Required:
- Compute the total gain or loss on the constructive retirement of debt.
- Allocate the total gain or loss between Pacelli Company and Salez Company.
- Prepare the book entries related to the bonds made by the individual companies during 2012.
- Assume that the two companies reported net income