The Following Information Pertains to Questions

question 7

Multiple Choice

The following information pertains to questions
Duff Inc.owns 75% of Paddy Corp.and uses the Equity Method to account for its investment.Paddy purchased $120,000 worth of Duff's 12% par value bonds on January 1,2001 for $100,000,when Duff's bond liability consisted of $240,000 par of 12% Bonds maturing on January 1,2011.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 2001,Paddy earned a net income of $80,000 and paid dividends of $20,000
-What was the pre-tax gain or loss to Duff Inc.on the intercompany sale of the bonds?

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

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Definitions:

Cost Method

An accounting approach where investments are recorded at their acquisition cost, without recognizing any changes in market value until they are sold.

Investment Account

An account held at a financial institution or brokerage used to hold, manage, and track securities investments and transactions.

Voting Shares

Shares that give the shareholder the right to vote on company matters, such as the election of the board of directors.

Bonds Payable

Long-term liabilities representing money owed by an entity to bondholders, to be repaid at a specified maturity date with interest.