Smart Company issued $106,000 of 10 percent bonds on January 1, 20X1, at 120. The bonds mature in 10 years and pay 10 percent interest annually on December 31. Phone Corporation holds 80 percent of Smarts voting shares, acquired on January 1, 20X1, at underlying book value. On January 1, 20X4, Phone purchased Smart bonds with a par value of $41,500 from the original purchaser for $45,650. Phone uses the modified equity method in accounting for its ownership in Smart. Partial balance sheet data for the two companies on December 31, 20X5, are as follows:

phone corporation smart company

investment in smart company stock $127,200

investment in smart company bonds $44,684

interest income $3,648

bonds payable $106,000

Bonds premium 12,408

interest expense 8591

common stock 300,000 100,000

retained earnings 500,000 50,000

Required: a. Compute the gain or loss on bond retirement reported in the 20X4 consolidated income statement. b. Prepare the consolidation entry needed to remove the effects of the intercorporate bond ownership in completing the consolidation worksheet for 20X5. c. What balance should be reported as consolidated retained earnings on December 31, 20X5?