QUESTION 2 (15 marks)

DaVinci Inc. owns 75% of the common shares of Rembrandt Corp. On January 1, 2017, DaVinci issued bonds with a par value of $350,000 which will mature on January 1, 2022. The bonds bear interest at an annual rate of 8%, with annual interest payments made each December 31^st. At the date of issue of the bonds, DaVinci received proceeds of $360,000. On January 1, 2019, Rembrandt purchased 40% of DaVincis bonds on the open market for $134,000. Both companies use the effective interest method. Both companies have a December 31st year- end and pay income taxes at a rate of 40%. Bond gains and losses are to be allocated to each company. During 2019, Rembrandt earned a net income of $80,000 and paid dividends of $20,000.

Market rates (Yield) for these bonds was 7.39% at issue date January 1, 2017 for DaVinci.

Market rate (Yield) for Rembrandt at investment date January 1, 2019 was 9.33%

REQUIRED:

a) Calculate the amount of the gain or loss that will appear as a separate item on the 2019 consolidated income statement, as a result of the bond transaction. (2 marks)

b) Calculate the after-tax gain or loss to Rembrandt on the purchase of the Bonds. (2 marks)

c) Calculate the after-tax gain or loss to DaVinci on the purchase of the Bonds. (2 marks)

d) What amount of after-tax interest expense (if any) would have to be eliminated in 2019 as a result of the purchase of the Bonds? (3 marks)

e) Calculate the non-controlling interests share of Rembrandts income for the year-ended

December 31, 2019. (3 marks)

f) What value would be shown on DaVincis December 31, 2019 Consolidated Balance Sheet for the Bond issue? (3 marks)