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E 7-10 Constructive retirement of parent's bonds Pad Corporation has $4,000,000 of 12 percent bonds outstanding on December 31, 2011, with unamortized premium of $120,000. These bonds pay interest semiannually on July 1 and January 1 and mature on January 1, 2017 On January 2, 2012, Sal Corporation, an 80 percent-owned subsidiary of Pad, purchases $1,000,000 par of Pad's outstanding bonds in the market for $980,000. ADDITIONAL INFORMATION 1. Pad and Sal use the straight-line method of amortization. 2. The financial statements are consolidated. 3. Pad's bonds are the only outstanding bonds of the affiliated companies. 4. Sal's net income for 2012 is $400,000 and for 2013, $600,000. Intercompany Profit Transactions-Bonds 237 REQUIRED 1. Compute the constructive gain or loss that will appear in the consolidated income statement for 2012. 2. Prepare a consolidation entry (entries) at December 31, 2012, to eliminate the effect of the intercompany bondholdings. 3. Compute the amounts that will appear in the consolidated income statement for 2013 for the following: a. Constructive gain or loss b. Noncontrolling interest share c. Bond interest expense d. Bond interest income 4. Compute the amounts that will appear in the consolidated balance sheet at December 31, 2013, for the following: a. Investment in Pad bonds b. Book value of bonds payable c. Bond interest receivable d. Bond interest payable