Problem
Prada Products Inc. owns 75% of the common shares of Sergio Corp. On January 1, 2019, Prada Products issued bonds with a par value of $350,000 which will mature on January 1, 2026. The bonds bear interest at an annual rate of 8%, with annual interest payments made each December 31st. At the date of issue of the bonds, Prada Products received proceeds of $360,000. On January 1, 2021, Sergio Corp. purchased 30% of Prada Products' bonds on the open market for $100,519. Both companies use the effective interest method. Both companies have a December 31st year-end and pay income taxes at a rate of 40%. Bond gains and losses are to be allocated to each company. During 2021, Sergio Corp. earned a net income of $80,000 and paid dividends of $20,000. Market rates (Yield) for these bonds was 7.46% at January 1, 2019 (issue date) and 9.10% at January 1, 2021 (Sergio purchased 30% of Prada Products' bonds).
Task
A. Calculate the amount of the gain or loss that will appear as a separate item on the 2021 consolidated income statement, as a result of the bond transaction.
B. Calculate the after-tax gain or loss to Sergio Corp. on the purchase of the Bonds.
C. Calculate the after-tax gain or loss to Prada Products on the purchase of the Bonds.
D. What amount of after-tax interest expense (if any) would have to be eliminated in 2021 as a result of the purchase of the Bonds?
E. What value would be shown on Prada Products' December 31, 2021 Consolidated Balance Sheet for the Bond issue (Bonds Payable)?
F. Calculate the non-controlling interest's share of Sergio's Income for the year-ended Dec. 31, 2021.