Wagner, a holder of a $1,000,000 Palmer, Inc. bonds, collected
the interest due on March 31, year 1, and then sold the
bonds to Seal, Inc. for $975,000. On that date, Palmer, a 75%
owner of Seal, had a $1,075,000 carrying amount for the bonds.
What was the effect of Seal’s purchase of Palmer’s bond on the
retained earnings and noncontrolling interest amounts reported
in Palmer’s March 31, year 1 consolidated balance sheet?

Retained earnings

Noncontrolling interest

(a) When Seal purchased the bonds from Wagner, the
bonds were viewed as retired from a consolidated viewpoint since
there is no longer any obligation to an outside party. Therefore,
the consolidated entity would recognize a $100,000 gain
($1,075,000 carrying amount – $975,000 cash paid), which
would increase consolidated retained earnings. This transaction
has no effect on noncontrolling interest, since the subsidiary
(Seal) has merely exchanged one asset for another (cash for investment
in bonds).