How bond transactions would affect the income statement

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Reference no: EM132760917

Pretzel Inc. owns 90% of Soda Corp. Soda purchased $200,000 face value of Pretzel's 10% par value bonds on January 1, 2018 for $222,500. Pretzel's total bond liability carrying value at that time consisted of $185,000 ($200,000 par) of bonds maturing on January 1, 2028. Both companies have a December 31 year end. Intercompany bond gains and losses are to be allocated to each company. The effective tax rate at the time was 35%.

Required:

Problem 1) Based on the above prepare a schedule of intercompany bond transactions including the effect on each company as well as the effect on the consolidated entity as of December 31, 2019.

Problem 2) Explain how bond transactions would affect the income statement. Be specific on which accounts would be affected.

Reference no: EM132760917

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