Constructive Gain or Loss on Bond Retirement with WorkpaperCost Method

(effective interest method)

Prezo Company purchased 80% of Satz Companys common stock for $880,000 on January 2, 2014. Condensed

financial information for Prezo Company and Satz Company is given below.

Balance Sheet

December 31, 2014

Prezo Co. Satz Co.

Current Assets $ 920,000 $ 580,000

Investment in Satz Company Common Stock 880,000

Investment in Satz Company Bonds 246,189

Other Assets 2,326,411 1,320,000

$4,372,600 $1,900,000

Bonds Payable (10%) $ 700,000 $ 400,000

Premium on Bonds Payable 20,968

Other Liabilities 1,454,600 129,032

Common Stock 1,600,000 800,000

Retained Earnings 618,000 550,000

$4,372,600 $1,900,000

Retained Earnings Statement

for the Year Ended December 31, 2014

Prezo Co. Satz Co.

1/1 Balance $ 480,000 $ 300,000

Net Income 388,000 400,000

Dividends (250,000) (150,000)

12/31 Balance $ 618,000 $ 550,000

Income Statement

for the Year Ended December 31, 2014

Prezo Co. Satz Co.

Sales $2,680,000 $1,860,000

Dividend Income 120,000

Other Income 266,000 120,000

Total Revenue 3,066,000 1,980,000

Expenses 2,678,000 1,580,000

Net Income $ 388,000 $ 400,000

On July 1, 2014, Prezo Company purchased 60% of Satz Companys bonds for $ 247,071 (a 9% yield). The bonds

mature on December 31, 2017. Interest of 10% per annum is paid on June 30 and December 31 each year. Both

companies use the effective interest method to amortize bond discounts and premiums. The Satz Co. bond was

originally issued to yield 8% and Prezo Companys bond was issued at par.

Required:

A. Compute the gain or loss on the constructive retirement of the bonds allocated to each of the affiliated

companies.

B. Prepare a consolidated financial statements workpaper on December 31, 2014.

C. Prepare in good form a schedule showing the calculation of consolidated net income for the year ended

December 31, 2014.