E 7-3 Constructive gain/loss on purchase of subsidiary bonds Abbey Corporation owns 90 percent of the voting common stock of Westminster Corporation. At December 31, 2016, Westminster has $900,000 par of 8 percent bonds outstanding with an unamortized discount of $30,000. The bonds pay interest on January 1 and July 1 of each year, and they mature in five years, on January 1, 2022. On January 2, 2017, Abbey Corporation purchases 50 percent of Westminster's outstanding bonds for $460,000 in cash. Assume straight-line amortization. 1. The amount of gain or loss that should be reported on Abbey Corporation and Subsidiary's consolidated income statement at December 31, 2017, is: a $25,000 loss b$25,000 gain c $20,000 loss d None of the above 2. The amount that Abbey Corporation should record as a piecemeal recognition of constructive gain or loss at December 31, 2017, is: a $5,000 b $4,500 c$5,500 d None of the above 3. Interest expense on Westminster bonds appears in the consolidated income for 2017 at: a $34,000 b$39,000 c $30,000 d None of the above 4. Interest income on Westminster bonds appears in the consolidated income for 2017 at: a $34,000 b $39,000 C $30,000 d None of the above 5. Consolidated net income for 2016 will be affected by the intercompany bond transactions as follows: a Decreased by the constructive loss of $20,000 b Increased by the elimination of interest income of $34,000 c Increased by the elimination of interest expense of $39,000 d None of the above E 7-3 Constructive gain/loss on purchase of subsidiary bonds Abbey Corporation owns 90 percent of the voting common stock of Westminster Corporation. At December 31, 2016, Westminster has $900,000 par of 8 percent bonds outstanding with an unamortized discount of $30,000. The bonds pay interest on January 1 and July 1 of each year, and they mature in five years, on January 1, 2022. On January 2, 2017, Abbey Corporation purchases 50 percent of Westminster's outstanding bonds for $460,000 in cash. Assume straight-line amortization. 1. The amount of gain or loss that should be reported on Abbey Corporation and Subsidiary's consolidated income statement at December 31, 2017, is: a $25,000 loss b$25,000 gain c $20,000 loss d None of the above 2. The amount that Abbey Corporation should record as a piecemeal recognition of constructive gain or loss at December 31, 2017, is: a $5,000 b $4,500 c$5,500 d None of the above 3. Interest expense on Westminster bonds appears in the consolidated income for 2017 at: a $34,000 b$39,000 c $30,000 d None of the above 4. Interest income on Westminster bonds appears in the consolidated income for 2017 at: a $34,000 b $39,000 C $30,000 d None of the above 5. Consolidated net income for 2016 will be affected by the intercompany bond transactions as follows: a Decreased by the constructive loss of $20,000 b Increased by the elimination of interest income of $34,000 c Increased by the elimination of interest expense of $39,000 d None of the above
