[Broag]

The wording of this MCQ is absolutely terrible and I don’t understand it. Can anyone help clarify? The answer explanation didn’t help at all. Thanks, Becker…

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 a decrease to retained earnings.

b.

Reported as a deferred credit to be amortized over the remaining life of the bonds.

c.

Included as an increase to retained earnings.

d.

Reported as a deferred debit to be amortized over the remaining life of the bonds.

REG - 79
FAR - ?
AUD - ?
BEC - ?

[Anonymous]

Consolidation *plus* bond amortization? Ain't touching this with a ten-foot pole. 😛

[Mehow]

I remember that question, but I took FAR a few months ago and can't remember. I found this online though.

The subsidiary issued the bonds at a discount and the parent paid a premium
for them on the market, this will result in a loss when we eliminate the
debt, which will ultimately reduce Retained earnings. The parent would record
the bonds as Investment in subsidiary's bonds. Your journal entry would be:

DR: Bonds payable (sub's books)
DR: Loss on extinguishment of debt (plug to balance the entry)
CR: Investment in subsidiary's bonds (parent's books)
CR: Discount on bonds payable (sub's books)

FAR = 86 4/22/16
BEC = 80 6/01/16
REG = 07/26/16
AUD = ?

[300]

It's constructive retirement for consolidation, right?

No income statement impact because the interest expense cancels the interest income.

Balance sheet impact has to be amortized. Whether it's a credit or debit depends whether they paid more or less for the bonds than they received when they were issued.

[Author]

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