A parent business purchases bonds on the open market that had previously been issued by a subsidiary of the parent firm. Consequently, the price paid by the parent is less than the amount of bonds that are currently recorded on the subsid- iary's books. When it comes to reporting the difference between the price paid and the carrying amount of the bonds, how should the parent report it on its consolidated financial statements?

A parent business purchases bonds on the open market that had previously been issued by a subsidiary of the parent firm. Consequently, the price paid by the parent is less than the amount of bonds that are currently recorded on the subsid- iary's books. When it comes to reporting the difference between the price paid and the carrying amount of the bonds, how should the parent report it on its consolidated financial statements?

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter6: Accounting Quality

Section: Chapter Questions

Problem 5QE: Assume that a corporation needs to enter the private debt market to raise funds for plant expansion....

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A parent company buys bonds on the open market that had been previously issued by its subsidiary. The price paid by the parent is less than the carrying amount of the bonds on the subsidiary’s records. How should the parent report the difference between the price paid and the carrying amount of the bonds on its consolidated financial statements? As a loss on retirement of the bonds. As a gain on retirement of the bonds. As an increase to interest expense over the remaining life of the bonds. Because the bonds now represent intra-entity debt, the difference is not reported.
A parent company acquires from a third party bonds that had been issued originally by one of its subsidiaries. What accounting problems are created by this purchase?
ntercompany debt that must be eliminated from consolidated financial statements may result from: a. one member of a consolidated group selling its bonds directly to another member of the group. b. one member of a consolidated group advancing funds to another member of the group so that the member may retire bonds it had issued to outside parties. c. one member of a consolidated group purchasing bonds from outside parties as an investment that had been issued to outside parities by another member of the group. d. all of the above.
When a company acquires an affiliated company’s debt instruments from a third party, how is the gain or loss on extinguishment of the debt calculated? When should this balance be recognized?
Debtholders receive note contracts, one for each note, that describe the payments promised by the issuer of the debt. In addition, the issuing corporation frequently enters a supplementary agreement, callcd a note indenture, with a trustee who represents the debtholders. The provisions or covenants of the indenture may place restrictions on the issuer for the benefit of the debtholders. For example, an indenture may require that the issuers debt to equity ratio never rise above a specified level or that periodic payments be made to the trustee who administers a sinking fund to provide for the retirement of debt. Consider Roswell Manufacturings debt indenture, which requires that Roswells debt to equity ratio never exceed 2:1. If Roswell violates this requirement, the debt indenture specifies very costly penalties, and if the violation continues, the entire debt issue must be retired at a disadvantageous price and refinanced. In recent years, Roswells ratio has averaged about 1.5:1 ($15 million in total liabilities and $10 million in total stockholders equity). However, Roswell has an opportunity to purchase one of its major competitors, Ashland Products. The acquisition will require $4.5 million in additional liabilities, but it will double Roswells net income. Roswell does not believe that a stock issue is feasible in the current environment. The Financial Accounting Standards Board issued a new standard concerning accounting for post employment benefits, which is strongly supported by the Securities and Exchange Commission. Implementation of the new standard will add about S2 million to Roswells long-term liabilities. Roswells CEO. Martha Cooper, has written a strong letter of objection to the FASB. The FASB received similar letters from over 300 companies. Required; 1. Write a paragraph presenting an analysis of the impact of the new standard on Roswell Manufacturing.
A subsidiary has a debt outstanding that was originally issued at a discount. At the beginning of the current year, the parent company acquired the debt at a slight premium from outside parties. Which of the following statements is true?a. Whether the balances agree or not, both the subsequent interest income and interest expense should be reported in a consolidated income statement.b. The interest income and interest expense will agree in amount and should be offset for consolidation purposes.c. In computing any noncontrolling interest allocation, the interest income should be included but not the interest expense.d. Although subsequent interest income and interest expense will not agree in amount, both balances should be eliminated for consolidation purposes.
A parent company acquires from a third party bonds that had been issued originally by one of its subsidiaries. Why is the consolidation process simpler if the bonds had been acquired directly from the subsidiary than from a third party?
If share warrants were exercised by the holder of compound financial instrument, liability would be derecognize a debit to the equity account related to share warrants will be done a credit to the equity account related to share warrants will be done share warrants outstanding account will not be affected. The proceeds from a bond issued with conversion feature should be accounted for entirely as bonds payable entirely as shareholders’ equity partially as unearned revenue and partially as bonds payable partially as shareholders’ equity and partially as bonds payable
A member of a consolidated group may sell its bond directly to another member of the group. This would result in an intercompany debt that must be eliminated from the consolidated statements. Another avenue is for the parent to purchase the subsidiary bonds from outside parties and hold the bonds as an investment. Using the above information discuss the ramifications the purchase of intercompany bonds would have when consolidating under the two options described above.
Dane, Inc., owns Carlton Corporation. For the current year, Dane reports net income (without consideration of its investment in Carlton) of $185,000 and the subsidiary reports $105,000. The parent had a bond payable outstanding on January 1, with a carrying amount of $209,000. The subsidiary acquired the bond on that date for $196,000. During the current year, Dane reported interest expense of $18,000 while Carlton reported interest income of $19,000, both related to the intra-entity bond payable. What is consolidated net income?a. $289,000b. $291,000c. $302,000d. $304,000
When one member of a consolidated group purchases only part of the outstanding bonds of another member of the group, for example, 80% of the bonds, __________________ Select one: a.all bonds, and all the interest expense and interest revenue applicable to the bonds should be eliminated. b.none of the bonds, and none of the interest expense and interest revenue applicable to the bonds should be eliminated. c.80% of the bonds, and 80% the interest expense and interest revenue applicable to the bonds should be eliminated. d.20% of the bonds, and 20% the interest expense and interest revenue applicable to the bonds should be eliminated.
When corporations issue bonds, there are two distinct obligations. What are those obligations? What do the following terms mean in regard to corporations issuing bonds: convertible, callable, and debenture?