Duff Inc Owns 75% of Paddy Corp

question 3

Multiple Choice

Duff Inc. owns 75% of Paddy Corp. and uses the Equity Method to account for its investment. Paddy purchased $120,000 face value of Duff's 12% par value bonds on January 1, 2011 for $100,000, when Duff's bond liability consisted of $240,000 par of 12% Bonds maturing on January 1, 2021. There was an unamortized bond discount of $20,000 attached to the bonds on that date. Interest payment dates are June 30 and December 31 each year. Straight line amortization is used. Both companies have a December 31 year end. Intercompany bond gains and losses are to be allocated to each company. During 2011, Paddy earned a net income of $80,000 and paid dividends of $20,000. What was the pre-tax gain or loss to Paddy Inc. on the intercompany purchase of the bonds?

• A) $20,000 loss.
• B) Nil.
• C) $20,000 gain.
• D) $40,000 loss.

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