Question

Assume that a parent company owns 100 percent of its subsidiary. On December 31, 2022, the parent company had a $360,000 (face) bond payable outstanding with a carrying value of $378,000. The bond was originally issued to an unaffiliated company. On that same date, the subsidiary acquired the bond for $356,400. During 2022, the parent company reported $162,000 of (pre-consolidation) income from its own operations (i.e., prior to any equity method adjustments by the parent company) and after recording interest expense. The subsidiary reported $90,000 of (pre-consolidation) income from its own operations. Related to the bond during 2022, the parent reported interest expense of $40,500. The unaffiliated company that held the bond prior to December 31, 2022 recorded interest income of $40,500. What is the gain or loss on the bond acquisition by the subsidiary?

1) Gain of $1,200
2) Loss of $1,200
3) Gain of $21,600
4) Loss of $21,600

Answer 1

The subsidiary has incurred a loss of $21,600 on the bond acquisition. The correct answer is: 4) Loss of $21,600.

Step-by-step explanation:

The gain or loss on the bond acquisition by the subsidiary can be calculated by comparing the carrying value of the bond by the parent company and the price at which the subsidiary acquired the bond.

The carrying value of the bond by the parent company is $378,000, and the price at which the subsidiary acquired the bond is $356,400. Therefore, the subsidiary has incurred a loss of $21,600 on the bond acquisition.

The correct answer is: 4) Loss of $21,600.