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Powell Company owns an 80% interest in Sauter, Inc. On January 1, 20X1, Sauter issued $400,000...

Powell Company owns an 80% interest in Sauter, Inc. On January 1, 20X1, Sauter issued $400,000 of 10-year, 12% bonds at a premium of $25,000. On December 31, 20X5, 5 years after original issuance, Powell purchased all of the outstanding bonds for $390,000. Both firms use the straight-line method of amortization. What is the gain on retirement on the 20X5 consolidated income statement?

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Answer #1

Cash paid by the company Powell for purchasing outstanding bond = $390000

Net value of Bond : Face value + Interest - Amortize amount of premium of 5years = Issue price +unamortise amount of premium of balance 5 years i.e $25000 of premium is spread over 10years, 5years have been passed and amount of $12500 is still available with the company. ($25000/10*5 = $12500)

($400000+$25000-$12500)=$412500

gain on retirement on the 20X5 consolidated income statement is $22500( $412500-$390000)

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