Duff Inc Owns 75% of Paddy Corp

question 38

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, 2020 for $100,000, when Duff's bond liability consisted of $240,000 par of 12% bonds maturing on January 1, 2030.
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 2020, 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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