Deck 6: Appendix B: Intercompany Bond Holdings

Question 1

For gains on intercompany bond holdings, which method of allocating the gain emphasizes substance over form?

A)Allocating the gain to the parent company as the parent company has ultimate control
B)Allocating the gain to the bond purchasing company as the bonds will be retired under consolidation
C)Allocating the gain to the bond issuing company under the agency approach
D)Allocating the gain between the issuing and purchasing companies under the par-value approach

Answer 1

C

Question 2

A subsidiary has purchased some bonds from its parent company. Under the par-value method, the non-controlling interest is allocated its share of the difference between ________.

A)the bond's market value and face value
B)the bond's face value and its carrying value on the subsidiary's books
C)the bond's market value and its carrying value on the subsidiary's books
D)the bond's par value and carrying value

Answer 2

B

Question 3

Basaraba Ltd. owns 75% of the outstanding common shares of Gill Ltd. Gill purchased all of Basaraba's outstanding bond issue on the open market at a discount. The bonds have an unamortized premium attached. This transaction, in effect, retires the bond and results in a gain. Under the par-value approach to dealing with a gain on elimination of intercompany bond holdings, which of the following statements is true?

A)The gain is allocated all to the purchaser.
B)The gain is allocated all to the issuer.
C)The gain is allocated to both the purchaser and issuer as though they do not have any affiliation with each other.
D)The gain is eliminated on consolidation.

Answer 3

C

Question 4

Basaraba Ltd. Owns 80% of the outstanding common shares of Gill Ltd. Gill purchased all of Basaraba's outstanding bond issue on the open market at a discount. The bonds have an unamortized premium attached. This transaction, in effect, retires the bond and results in a gain. Under the agency approach to dealing with a gain on elimination of intercompany bond holdings, which of the following statements is true?

A)The gain would be assigned to Basaraba.
B)The gain would be assigned to Gill.
C)The gain is assigned partially to Basaraba and partially to Gill.
D)The gain is eliminated on consolidation.

Question 5

Gill Ltd. is the wholly owned subsidiary of Basaraba Ltd. Gill purchased all of Basaraba's outstanding bond issue on the open market at a discount. The bonds have an unamortized premium attached. This transaction, in effect, retires the bond and results in a gain. How should the gain be shown?

A)It will appear on Basaraba's separate-entity statement of comprehensive income only.
B)It will appear on both Basaraba's separate-entity and consolidated statements of comprehensive income.
C)It will appear on Basaraba's consolidated statement of comprehensive income only.
D)It will be added to the value of the bonds payable on Basaraba's statement of financial position.

Question 6

Soft Limited owns 70% of the shares of Hard Co. On January 1, 20X5, Hard Co. issued $1,000,000 bonds payable at 6%, due on December 31, 20X10. The bonds were issued for $907,542, representing a yield of 8%. The interest is paid annually on December 31. On January 1, 20X6, Soft purchased $300,000 face value of Hard bonds for $287,700 when the bonds were yielding 7%.
Required:
Both companies use the effective interest rate to amortize the bonds. Prepare the eliminating journal entries relating to the bonds as they would appear on the consolidated worksheet. The agency method is used. Calculate the consolidated bonds payable account at December 31, 20X6, assuming there are no other bonds outstanding.