Keenan Company has had bonds payable of $20,000 outstanding for several years. On January 1, 2011, there was an unamortized premium of $2,000 with a remaining life of 10 years, Keenan's parent, Ross, Inc., purchased the bonds in the open market for $19,000. Keenan is a 90% owned subsidiary of Ross. The bonds pay 8% 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 2011.
A) $3,000 gain.
B) $3,000 loss.
C) $1,000 gain.
D) $1,000 loss.
E) $2,000 gain.

Question

Quizplus · Accepted Answer

The consolidated gain is calculated as the difference between the book value of the bonds and the purchase price. The book value is $20,000 (face value) + $2,000 (unamortized premium) = $22,000. The purchase price is $19,000. Therefore, the gain is $22,000 - $19,000 = $3,000.

Keenan Company Has Had Bonds Payable of $20,000 Outstanding for Several