Identify the appropriate answer for the given statement from the given choices.

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Chapter 6, Problem 4P

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Identify the appropriate answer for the given statement from the given choices.

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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 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.