The Following Information Pertains to Questions

question 50

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 would be the pre-tax gain or loss to the combined entity 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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