Computations Following Parents Acquisition of Subsidiary Bonds (Straight-Line Method)

Phone Corporation holds 80 percent of Smart Companys voting shares, acquired on January 1, 20X1, at underlying book value. On January 1, 20X4, Phone purchased Smart bonds with a par value of $40,000. The bonds pay 10 percent interest annually on December 31 and mature on December 31, 20X8. Phone uses the fully adjusted equity method in accounting for its ownership in Smart. Partial balance sheet data for the two companies on December 31, 20X5, are as follows:

		Phone Corporation		Smart Company
Investment in Smart Company Stock		$121,680
Investment in Smart Company Bonds		42,400
Interest Income		3,200
Bonds Payable				$100,000
Bond Premium				11,250
Interest Expense				6,250
Common Stock		300,000		100,000
Retained Earnings, December 31, 20X5		501,680		50,000

Required

Compute the gain or loss on bond retirement reported in the 20X4 consolidated income statement.

What equity method entry would Phone make on its books related to the bond retirement in 20X5?

Prepare the consolidation entry needed to remove the effects of the intercorporate bond ownership in completing the consolidation worksheet for 20X5.

What balance should be reported as consolidated retained earnings on December 31, 20X5?