Concept explainers
Bonds of affiliate purchased from non-affiliate: When an affiliate of issuer later acquires bonds form unrelated party, the bonds are retired at the time of purchase. The bonds are not held outside the consolidated entity once another company within the consolidated entity purchases them, it must be treated as repurchase by debtor. Acquisition of an affiliate’s bonds by another company with in affiliated entities is referred as constructive retirement. Although bonds are not actually retired.
When constructive retirement occurs the consolidated income statement reports gain or loss based on difference between carrying value and purchase price paid by affiliate to acquire it. And it is not reported in consolidated balance sheet either as bond payable or as investment because the bonds are no longer outstanding.
To explain : what will be the effect on consolidated net income when the parent sell the bonds. When parents purchases subsidiary bonds directly from it and later sell the bonds to non-affiliate.
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Advanced Financial Accounting
- 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.arrow_forwardHow is the Non-Controlling Interest displayed in a consolidated balance sheet? a. As a separate item in the stockholder’s equity section b. By means of a note to consolidated financial statements c. As a separate item between the liabilities and stockholder’s equity d. As a deduction from goodwill, if any e. Non-controlling interest is never presented in consolidated balance sheet.arrow_forwardWhen a wholly-owned subsidiary purchases all of the bonds issued by the parent, the investment in bonds account and bond payable account are Multiple Choice • not reported in the consolidated financial statements and also not reported in the separate-entity financial statements. • reported on the subsidiary’s balance sheet. • reported on the respective separate-entity balance sheets. • reported on the parent’s balance sheet.arrow_forward
- 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.arrow_forwardWhen 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?arrow_forwardWhat is a noncontrolling interest? Select one: A. A component of debt representing amounts owed to a subset of investors B. Amounts distributed to investors that own less than a controlling interest C. The portion of a subsidiary’s net assets not owned by the parent-company D. An amount equal to investor contributions less dividends distributedarrow_forward
- 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.arrow_forwardThe 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.arrow_forwardWhich of the following statements regarding IFRS consolidated financial statements is/are correct: (i) An entity that has equity investments in one or more other entities is required to present consolidated financial statements (ii) A parent whose debt or equity instruments are not traded in a public market is not required to present consolidated financial statements (iii) Consolidated financial statements present the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries as those of a single economic entityarrow_forward