Concept explainers
Bondsof affiliate purchased from non-affiliate: When an affiliate of issuer later acquires bonds from 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
To explain : Balances which will be shown incorrectly in consolidation if the intercompany bonds are not eliminated in consolidation worksheet.
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Chapter 8 Solutions
ADVANCED FINANCIAL ACCOUNTING IA
- 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_forwardWhy must the eliminating entries be entered in the consolidation worksheet each time consolidated statements are prepared?How is the beginning-of-period non-controlling interest balance determined?How is the end-of-period non-controlling interest balance determined? Provide an example.arrow_forwardA 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?arrow_forward
- Which of the following is NOT included in the cost of an acquired company? (applying section 19 of IFRS for SMEs) a. Contingent consideration determinable at the consummation date of the combination b. Finder’s fee for arranging the combination c. Cost of registering and issuing equity securities d. None of the abovearrow_forwardWhich of the following should appear in consolidated financial statements? a. All intercompany transactions properly recorded on each affiliate’s books. b. Transactions between the consolidated company and outside parties. c. Transactions not accounted for by the simple equity method. d. Lease transactions between a parent and subsidiary.arrow_forwardA 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?arrow_forward
- Which of the following statements is TRUE? O The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair value. O According to IFRS #3: Revised, cost directly attributable in effecting the business combination (e.g., finders' fee and other direct cost) must be charged to share premium. Transaction costs directly related to the issue of debt instruments are deducted from the fair value of the debt on initial recognition and are amortized over the life of the debt as part of the effective interest rate. Directly attributable transaction costs incurred issuing equity instruments are deducted from revenue. In net asset acquisition, gain on bargain purchase is recognized in the Profit or Loss of the acquirer (after reassessment) if the consideration transferred is more than the fair value of net assets acquired.arrow_forwardDebtholders 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.arrow_forwardWhich of the following is correct regarding the classification of investment in debt instruments as financial asset at fair value through OCI? Group of answer choices A. An entity may make an irrevocable election to classify investment in a debt instrument that is not ‘held for trading’ as such. B. All of these. C. This classification is not allowed for investment in debt instruments. D. In order to be classified as such, a debt instrument needs to both have simple principal and interest cash flows and be held in a business model in which both holding and selling financial assets are integral to meeting management’s objectives.arrow_forward
- 1.- Why are bonds treated as retired during the consolidation process? 2.- How long-term construction contract are accounted on the consolidation process. 3.- how accounting for operating and capital lease are treated on the consolidation process.arrow_forwardHow is the amount assigned to the non-controlling interest normally determined when a consolidated balance sheet is prepared immediately after a business combination?arrow_forwardDebtholders 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, called 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; 2. If you were a member of the FASB and met Martha Cooper at a professional meeting, how would you respond to her objection?arrow_forward
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