Chapter 8, Problem 8.21P

To determine

Bondsof 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.

When constructive retirement occurs, the consolidated income statement report gain or loss based on the difference between carrying value and purchase price paid by affiliate to acquire it. It is not reported in consolidated balance sheet either as bond payable or as investment because the bonds are no longer outstanding.

The worksheet consolidation entries as of December 31, 20X4, to remove the effects of intercompany bond ownership