Question
Playa Company holds 80% of Sol Companys stock, acquired on January 1, 20X1, at underlying book value. On January 1, 20X4, Playa purchased Sol bonds
Playa Company holds 80% of Sol Companys stock, acquired on January 1, 20X1, at underlying book value. On January 1, 20X4, Playa purchased Sol bonds with a par value of $40,000. The bonds pay 10% interest annually on December 31 and mature on December 31, 20X9. Playa uses the fully adjusted equity method in accounting for its ownership in Sol. Partial balance sheet information for the two companies on December 31, 20X5 is below:
| Playa Company | Sol Company |
Investment in Sol Company stock | $121,860 |
|
Investment in Sol Company bonds | 42,400 |
|
Interest income | 3,200 |
|
Bonds payable |
| $100,000 |
Interest expense |
| 11,500 |
Common stock | 300,000 | 100,000 |
Retained earnings, December 31, 20X5 | 501,680 | 50,000 |
Compute the gain or loss on bond retirement reported in the 20X4 consolidated income statement. (remember format: 1,000 not 1000)
What equity method entry would Playa make on its books related to the bond retirement in 20X5? (format for answer should be: Dr. xxx #, Cr. yyy #)
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