Sibling Company issued $590,000 par value, 10-year bonds at 104 on January 1, 20X3, which Mega Corporation purchased. The coupon rate on the bonds is 11 percent. Interest payments are made semiannually on July 1 and January 1. On July 1, 20X6, Parent Company purchased $236,000 par value of the bonds from Mega for $228,200. Parent owns 65 percent of Siblings voting shares.

1. Will a gain or loss be reported in the 20X6 consolidated financial statements for Parent for the constructive retirement of bonds? What amount will be reported?

A gain of $14,940 will be reported:

Book value of liability reported by Sibling:
Par value of bonds outstanding	$236,000
Unamortized premium $17,851 (2/5)	7,140
Book value of debt	$ 243,140
Amount paid by Parent	(228,200)
Gain on bond retirement	$ 14,940

Q1.How is the unamortized premium calculated?

2. How much will Parents purchase of the bonds change consolidated net income for 20X6?

Consolidated net income for 20X6 will increase by $14,122:

Gain on bond retirement		$ 14,940
Adjustment for excess of interest income over interest expense:
Interest income	$ (13,398)
Interest expense	12,580	(818)
Increase in consolidated net income		$ 14,122

Q2. How is the interest expense calculated?

3. If Sibling reports net income of $59,000 for 20X7, what amount of income will be assigned to the noncontrolling interest in the consolidated income statement?

Income assigned to noncontrolling interest in 20X7 is $20,029:

Net income reported by Sibling		$ 59,000
Adjustment for excess of interest income over interest expense:
Interest income	$ (26,870)
Interest expense	25,097	(1,773)
Realized net income		$ 57,227
Proportion of ownership held		0.35
Income assigned to noncontrolling interest		$ 20,029

Q3. How is the interest income and expense calculated?