Can someone please explain these 2 questions to me from Inter company transactions in simple words:
Question 1: Wagner, a holder of a $1,000,000 Palmer, Inc. bond, collected the interest due on March 31, Year 1, and then sold the bond to Seal, Inc. for $975,000. On that date, Palmer, a 75% owner of Seal, had a $1,075,000 carrying amount for this bond. 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. $75,000 increase $25,000 increase
b. $0 $25,000 increase
c. $100,000 increase $0
d. $0 $100,000 increase
Answer :
Choice “c” is correct, $100,000 increase in consolidated earnings. $0 effect on noncontrolling interest. The purchase of the parent company bond by the subsidiary is treated as if the bond were retired when the financial statements are consolidated. Because the bond had a book value of $1,075,000, but was “retired” for $975,000, a gain is recorded upon consolidation.
Noncontrolling interest is only adjusted if the bonds were originally issued by the subsidiary and, as a result, a portion of the gain must be allocated to the noncontrolling interest. In this problem, the parent issued the bonds, so the elimination has no impact on noncontrolling interest.
Question 2:
P Co. purchased term bonds at a premium on the open market. These bonds represented 20 percent of the outstanding class of bonds issued at a discount by S Co., P's wholly owned subsidiary. P intends to hold the bonds until maturity. In a consolidated balance sheet, the difference between the bond carrying amounts in the two companies would be:
a.Included as an increase to retained earnings.
b.Reported as a deferred credit to be amortized over the remaining life of the bonds.
c.Included as a decrease to retained earnings.
d.Reported as a deferred debit to be amortized over the remaining life of the bonds.
Answer: Choice “c” is correct, in a consolidated balance sheet, the difference between the bond carrying amounts would be included as a decrease to retained earnings because a premium was paid to “retire” the bonds.
Rule: When members of a consolidated group have intercompany bond holdings, the bonds are eliminated in consolidation and the difference (gain or loss) between the discounted issue price and the premium on reacquisition would be included in retained earnings.
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