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Presentation/PPT
27/08/2022
Constructive Gain or Loss on Bond Retirement with Workpaper—Cost Method
(effective interest method)
Prezo Company purchased 80% of Satz Company’s common stock for $880,000 on January 2, 2014. Condensed
financial information for Prezo Company and Satz Company is given below.
Balance Sheet
December 31, 2014
Prezo Co. Satz Co.
Current Assets $ 920,000 $ 580,000
Investment in Satz Company Common Stock 880,000
Investment in Satz Company Bonds 246,189
Other Assets 2,326,411 1,320,000
$4,372,600 $1,900,000
Bonds Payable (10%) $ 700,000 $ 400,000
Premium on Bonds Payable 20,968
Other Liabilities 1,454,600 129,032
Common Stock 1,600,000 800,000
Retained Earnings 618,000 550,000
$4,372,600 $1,900,000
Retained Earnings Statement
for the Year Ended December 31, 2014
Prezo Co. Satz Co.
1/1 Balance $ 480,000 $ 300,000
Net Income 388,000 400,000
Dividends (250,000) (150,000)
12/31 Balance $ 618,000 $ 550,000
Income Statement
for the Year Ended December 31, 2014
Prezo Co. Satz Co.
Sales $2,680,000 $1,860,000
Dividend Income 120,000
Other Income 266,000 120,000
Total Revenue 3,066,000 1,980,000
Expenses 2,678,000 1,580,000
Net Income $ 388,000 $ 400,000
On July 1, 2014, Prezo Company purchased 60% of Satz Company’s bonds for $ 247,071 (a 9% yield). The bonds
mature on December 31, 2017. Interest of 10% per annum is paid on June 30 and December 31 each year. Both
companies use the effective interest method to amortize bond discounts and premiums. The Satz Co. bond was
originally issued to yield 8% and Prezo Company’s bond was issued at par.
Required:
A. Compute the gain or loss on the constructive retirement of the bonds allocated to each of the affiliated
companies.
How do I compute the unamortized premium on bonds?
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