Duff Inc Owns 75% of Paddy Corp

question 53

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 would be the pre-tax gain or loss to the combined entity on the intercompany sale of the bonds?

• A) $20,000 loss.
• B) $10,000 loss.
• C) Nil.
• D) $10,000 gain.

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Definitions:

Standard Costs

Standard costs are the predetermined costs associated with manufacturing a product or delivering a service, used as benchmarks to measure performance.

Actual Costs

The real expenses incurred in the production or acquisition of goods and services.

Direct Labor Rate Variance

This measures the difference between the actual cost of direct labor and the expected (or standard) cost, calculated by comparing the actual rates paid to workers versus the planned rates.

Overhead

All ongoing business expenses not directly attributed to creating a product or service. This includes costs like rent, utilities, and salaries of employees not directly involved in production.