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venchlu
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Joined: 18 Aug 2009
Location: United States
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Posts: 587

Posted: 13 Apr 2010 at 09:40 \| IP Logged

This question is from Becker-

P Co. purchased term bonds at a premium on the open market. These bonds represented 20 percent of the outstanding class of bonds issued at a discount by S Co., P's wholly owned subsidiary. P intends to hold the bonds until maturity. In a consolidated balance sheet, the difference between the bond carrying amounts in the two companies would be:

a. Included as a decrease to retained earnings.

b. Included as an increase to retained earnings.

c. Reported as a deferred debit to be amortized over the remaining life of the bonds.

d. Reported as a deferred credit to be amortized over the remaining life of the bonds.

The correct answer is A. Can someone set up numbers and explain it to me? I appreciate it.....I have tried to put in numbers ; however, I wasn't sure of the result...thx in advance.

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venchlu
Major Contributor

Joined: 18 Aug 2009
Location: United States
Online Status: Offline
Posts: 587

Posted: 13 Apr 2010 at 10:07 \| IP Logged

Never mind my question- i have found someone before posted the same question and the answer is -

Let's Say: Sub had the bond at CV of 100,000 and Face Value of 200,000 before selling it. Parent bought it at premium, so let's say Parent bought it for 300,000

Remember: For Intercompany Bond Transactions, you have to calculate the gain/loss on retired bonds and eliminate any premium/discount as well as investment in debt.

Intercompany Elimination Journal Entry:
Dr: Bond Payable 200,000 [face value]
Cr: Discount 100,000 [cv - face value]
Cr: Investment in debt 300,000 [price paid by parent]
Dr: Loss on retired bond 200,000 [cv - price paid by parent]

Thus, Loss on retired bonds would decrease your R/E.

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