Intercompany Elimination MCQ

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    Topic
  • #196313
    levhelm
    Member

    On December 31, 2008, Pico acquired $250,000 par value of the outstanding $1,000,000 bonds of its subsidiary, Sico, in the market for $200,000. On that date, Sico had a $100,000 premium on its total bond liability.

    Which one of the following is the net amount of gain or loss that will be recognized by Pico in its December 31, 2008, consolidated financial statements as a result of its intercompany bonds?

    A. $25,000

    B. $50,000

    C. $75,000

    D. $150,000

    The answer is $75,000. Can somebody please explain why it is $75,000 and not $25,000? I understand that it’s related to an intercompany elimination, but the explanation just isn’t sinking in very well. Any help is much appreciated. Thanks!

    Passed

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  • #688046
    ScarletKnightCPA
    Participant

    The Book value of the Bond is $275,000 ([Total Par + Total Premium] x % of Bond purchased)

    Fair Market Value of Bond is $200,000

    Therefore, they are recognizing a $75,000 Loss. Since it is consolidated Financial Statements, Pico (parent) is recognizing the full loss below book value despite purchasing at $200,000.

    Far: 76 (Wiley Test Bank)
    Aud: 77 (Wiley Test Bank)
    Reg: 61, 76 (Wiley book, Wiley Test Bank)
    Bec: 86 (Wiley Test Bank)

    MBA in progress

    #688047
    levhelm
    Member

    Ok, I can see where you are going, so thank you for this. The test bank says it's a gain though.

    Passed

    #688048
    ScarletKnightCPA
    Participant

    Yeah you're right it's a gain. It's a liability, the fmv of the liability decreased, hence $75,000 gain. Parent buying it does not make it an asset, it's still a liability. Intercompany transactions get confusing sometimes.

    Far: 76 (Wiley Test Bank)
    Aud: 77 (Wiley Test Bank)
    Reg: 61, 76 (Wiley book, Wiley Test Bank)
    Bec: 86 (Wiley Test Bank)

    MBA in progress

    #688049
    FAR_WARS
    Participant

    Are these entries correct? I don't really understand how the bonds were issued at a discount, but at year end we are debiting 25 of unamortized premium. Maybe i goofed it up.

    parent:

    investment 200


    cash 200

    sub:

    cash 200

    disc 50


    bp 250

    eliminating entry:

    BP 250

    prem 25


    investment 200


    gain 75

    FAR- 80
    BEC- 75
    AUD- 78
    REG- ?

    #688050
    studytexas
    Member

    The sub has the following liability on the books: $1,100,000. “Sico has a 10% premium on its total liability.” 1.1X $1,000,000=$1,100,000. $250,000 par represents 25% of the total outstanding 250,000/1,000,000=25%. 25% of the total liability on the BOOKS of the sub is $1,100,000 X 25%=$275,000.

    The Parent just retired $275,000 of debt of its subsidiary at a cost of $200,000. The parent consolidates the sub. That is a gain of $75,000.

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