Sow Corporation is a 70 percent-owned subsidiary of Pan Corporation. On January 2, 2011, Sow purchased $600,000

Question:

Sow Corporation is a 70 percent-owned subsidiary of Pan Corporation. On January 2, 2011, Sow purchased $600,000 par of Pan’s $900,000 outstanding bonds for $602,000 in the bond market. Pan’s bonds have an 8 percent interest rate, pay interest on January 1 and July 1, and mature on January 1, 2015. There was $48,000 unamortized premium on the bond issue on January 1, 2011. Assume straight-line amortization.

1. The constructive gain or loss that should appear in the consolidated income statement of Pan Corporation and Subsidiary for 2011 is:

a. $30,000 gain

b. $46,000 gain

c. $2,000 loss

d. $30,000 loss

2. Interest expense that should appear in the 2011 consolidated income statement for Pan’s bond issue is:

a. $28,000

b. $24,000

c. $20,800

d. $20,000

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