Intercompany sale of bonds: when a company sells bonds to its subsidiary, all effects of the intercompany indebtedness must be eliminated. A company cannot report an investment in its own bonds to itself. Thus when the consolidated entity is viewed as a single company, all amounts associated with intercompany indebtedness must be eliminated, including investment in bonds, the bonds payable any unamortized discount or premium, the interest income or expenses on the bonds and any accrued interest receivable or payable.
Retirement of bonds: when a constrictive retirement occurs, the consolidated income statement for the period reports a gain or loss on retirement, but not reported in consolidated balance sheet. If the company purchases the bond of an affiliate from an unrelated party at a price equal to the liability reported, the elimination entries required to be prepared in consolidated financial statement.
The consolidation entries to remove the effects of intercompany bond ownership in preparing consolidated financial statements.
b
Intercompany sale of bonds: when a company sells bonds to its subsidiary, all effects of the intercompany indebtedness must be eliminated. A company cannot report an investment in its own bonds to itself. Thus when the consolidated entity is viewed as a single company, all amounts associated with intercompany indebtedness must be eliminated, including investment in bonds, the bonds payable any unamortized discount or premium, the interest income or expenses on the bonds and any accrued interest receivable or payable.
Retirement of bonds: when a constrictive retirement occurs, the consolidated income statement for the period reports a gain or loss on retirement, but not reported in consolidated balance sheet. If the company purchases the bond of an affiliate from an unrelated party at a price equal to the liability reported, the elimination entries required to be prepared in consolidated financial statement.
The consolidation entries to remove the effects of intercompany bond ownership in preparing consolidated financial statements in the next year 20X6.
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Chapter 8 Solutions
Advanced Financial Accounting
- On January 1, 2019, Brewster Company issued 2,000 of its 5-year, 1,000 face value, 11% bonds dated January 1 at an effective annual interest rate (yield) of 9%. Brewster uses the effective interest method of amortization. On December 31, 2023, Brewster extinguished the 2,000 bonds early through acquisition in the open market for 1,980,000. On July 1, 2022, Brewster issued 5,000 of its 6-year, 1,000 face value, 10% convertible bonds dated July 1 at an effective annual interest rate (yield) of 12%. The bonds are convertible at the option of the investor into Brewsters common stock at a ratio of 10 shares of common stock for each bond. Brewster uses the effective interest method of amortization. On July 1, 2023, an investor in Brewsters convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Brewsters common stock, which had a market value of 105 per share at the date of the conversion. Required: 1. Using the information about Brewster, answer the following questions: a. Were the 11% bonds issued at par, at a discount, or at a premium? Why? b. Is the amount of interest expense for the 11% bonds using the effective interest method of amortization higher in the first or second year of the life of the bond issue? Why? 2. Using the information about Brewster, explain the following: a. How is a gain or loss on early extinguishment of debt determined? Does the early extinguishment of the 11% bonds result in a gain or loss? Why? b. How does Brewster report the early extinguishment of the 11% bonds on the 2023 income statement? 3. Based on the information provided about Brewster, answer the following questions: a. Does recording the conversion of the 10% convertible bonds into common stock under the book value method affect net income? What is the rationale for the book value method? b. Does recording the conversion of the 10% convertible bonds into common stock under the market value method affect net income? What is the rationale for the market value method?arrow_forwardEli Inc. issued $100,000 of 8% annual, 5-year bonds for $103,000. What is the total amount of interest expense over the life of the bonds?arrow_forwardStarmount Inc. sold bonds with a $50,000 face value, 12% interest, and 10-year term at $48,000. What is the total amount of interest expense over the life of the bonds?arrow_forward
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