Davis Company has had bonds payable of $12,000 outstanding for several years. On January 1, 2021, when there was an unamortized discount of $1,000 and a remaining life of 5 years, its 90% owned subsidiary, Jacobson Company, purchased the bonds in the open market for $13,000. The bonds pay 6% interest annually on December 31. The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2021.
A) $1,000 gain.
B) $1,000 loss.
C) $2,000 gain.
D) $2,000 loss.
E) $3,000 gain.

Question

Quizplus · Accepted Answer

The bonds were purchased for $13,000, which is $2,000 more than their book value of $11,000 ($12,000 face value - $1,000 unamortized discount). This results in a $2,000 loss on the consolidated income statement.

Davis Company Has Had Bonds Payable of $12,000 Outstanding for Several