14.Sousa Corporation is an 80% owned subsidiary of Phillips Company. Sousa purch

Question

14.Sousa Corporation is an 80% owned subsidiary of Phillips Company. Sousa purchased bonds of Phillips Company for $103,000. Phillips Company reported the bond liability on the date of purchase at $100,000 less unamortized discount of $5,000. Assuming that the constructive gain or loss is material, the consolidated income statement should report an

a.ordinary loss of $8,000.

b.ordinary gain of $8,000.

c.extraordinary loss of $8,000 adjusted for income tax effects.

d.extraordinary gain of $8,000 adjusted for income tax effects.

Explanation / Answer

PHILIPS COMPANY SOLD ITS BOND AT ADISCOUNT OF $5000 I;E $95000. BUT SOUSA CORPORATION 80% OWNED SUBSIDIARY PURCHASED THE BOND IN OPEN MARKET FOR $103000. SO THE GAIN OF $8000($103000 - $95000) WILL BE TREATED AS REALIZED ETRAORDINARY GAIN WHICH HAVE TO ADJUSTED FOR INCOME TAX EFFECT.

ANS D

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