Question
Parent Inc. owns 75% of Sub Corp. and uses the Equity Method to account for its investment. Parent purchased $120,000 face value of Sub's 12%
Parent Inc. owns 75% of Sub Corp. and uses the Equity Method to account for its investment. Parent purchased $120,000 face value of Sub's 12% par value bonds on January 1, 2020 for $100,000, when Sub's bond liability consisted of $240,000 par of 12% bonds maturing on January 1, 2030. There was an unamortized bond discount of $20,000 attached to the bonds on that date. Interest payment dates are June 30 and December 31 each year. Straight line amortization is used. Both companies have a December 31 year end. Intercompany bond gains and losses are to be allocated to each company. During 2020, Parent earned a net income of $80,000 and paid dividends of $20,000.
What would be the pre-tax gain or loss to the combined entity on the intercompany sale of the bonds?
A. $20,000 loss
B. $10,000 loss
C. Nil
D. $10,000 gain
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