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 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.

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter6: Audit Evidence

Section: Chapter Questions

Problem 15CYBK

See similar textbooks

Similar questions

Choose the correct. 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 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 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?a. As a loss on retirement of the bonds.b. As a gain on retirement of the bonds.c. As an increase to interest expense over the remaining life of the bonds.d. Because the bonds now represent intra-entity debt, the difference is not reported.
A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the equity method. Why might the company have made this decision? It is a relatively easy method to apply. Operating results appearing on the parent’s financial records reflect consolidated totals. GAAP now requires the use of this particular method for internal reporting purposes. Consolidation is not required when the parent uses the equity method.
The motivation of a parent company to purchase the outstanding bonds of a subsidiary could be to: a. replace the existing debt with new debt at a lower interest rate. b. reduce the parent company's acquisition price for the subsidiary. c. increase the parent company's ownership percentage in the subsidiary. d. create interest revenue to offset interest expense in future income statements.
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?
In the consolidated statement of comprehensive income to be prepared by the parent corporation, which of the following items will affect both consolidated net income attributable to parent and non-controlling interest in net income? Impairment loss on goodwill recognized when the noncontrolling interest is measured at proportionate share of fair value of net assets of subsidiary. Amortization of difference between fair value and book value of liability of subsidiary. Realization of unrealized gain or (loss) from sale of parent company to subsidiary company. Recognition of gain on bargain purchase arising from business combination.
How is the portion of consolidated earnings to be assigned to the non-controlling interest in consolidated financial statements determined?A. The amount of the subsidiary’s earnings recognized for consolidation purposes is multiplied by the non-controlling interest percentage on the balance sheet date.B. The amount of consolidated earnings on the consolidated work papers is multiplied by the non-controlling interest percentage on the balance sheet date.C. The subsidiary’s net income is extended to the non-controlling interestD. The parent’s net income is subtracted from the subsidiary’s net income to determine the non-controlling interest.
Effects on consolidated financial statements of acquisition of affiliate's debt from non-affiliate On January 1, 2022, a Parent company has a debt outstanding that was originally issued at a discount and was purchased, on issuance, by an unaffiliated party. On January 1, 2022, a Subsidiary of the Parent purchased the debt from the unaffiliated party. The debt was purchased by the Subsidiary at a slight premium. The Parent is a calendar year company. Which one of the following statements is true? The consolidated balance sheet at December 31, 2022 will report none of the debt, and the consolidated income statement for the year ended December 31, 2022 will report a gain or loss from constructive retirement of the debt and will not report any interest expense from the debt. The consolidated balance sheet at December 31, 2022 will report the debt, and the consolidated income statement for the year ended December 31, 2022 will not report any interest expense from the debt. The consolidated…
Choose the correct. A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the equity method. Why might the company have made this decision?a. It is a relatively easy method to apply.b. Operating results appearing on the parent’s financial records reflect consolidated totals.c. GAAP now requires the use of this particular method for internal reporting purposes.d. Consolidation is not required when the parent uses the equity method.
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?
Which of the following is not typical of the journal entries prepared by a parentcompany to account for its subsidiary’s operations under the cost method ofaccounting A. A credit to the intercompany dividend income account B. Deprecation and amortization of differences between current fair values and book values of the subsidiary’s identifiable net assets on the date of the acquisition. C. None of the foregoing. D. Accrual of the parent company’s share of the subsidiary’s net income or loss