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On December 31, 2008, Pico acquired $250,000 par value of the outstanding $1,000,000 bonds of its subsidiary, Sico, in the market for $200,000. On that date, Sico had a $100,000 premium on its total bond liability.Which one of the following is the net amount of gain or loss that will be recognized by Pico in its December 31, 2008, consolidated financial statements as a result of its intercompany bonds?A. $25,000B. $50,000C. $75,000D. $150,000

Respuesta :

Answer:

C. $75000

Explanation:

Upon consolidation of financial statements all inter-related/company sales/provision for unrealized profits (PUPs) need to be eliminated in full. In this case, there are two important things to focus on,

FIRST, the bonds have been issued at a discount  and

SECOND, there is a total $100,000 premium on the bond liability, but because only 25% ($250,000/$1,000,000× 100 = 25%) of the bonds are inter-company, only 25% of the premium is eliminated. Thus, $25,000 of premium and the $50000 of discount totaling $75000 achieved is the total net amount of gain that PICO will recognize in its December 31, 2018 consolidated financial statements.

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