Company P owns a 90% interest in Company S.Company S has outstanding $100,000 of 10% bonds that were sold at face value and have 6 years to maturity as of the balance sheet date.Company P owns $70,000 of the bonds and has a remaining unamortized book value of $66,000.Company S bonds will be presented on the consolidated balance sheet as
A)bonds payable, $30,000.
B)bonds payable, $34,000.
C)bonds payable, $100,000.
D)bonds payable will not appear.

Question

Company P owns a 90% interest in Company S.Company S has outstanding $100,000 of 10% bonds that were sold at face value and have 6 years to maturity as of the balance sheet date.Company P owns $70,000 of the bonds and has a remaining unamortized book value of $66,000.Company S bonds will be presented on the consolidated balance sheet as
A)​bonds payable, $30,000.
B)​bonds payable, $34,000.
C)​bonds payable, $100,000.
D)​bonds payable will not appear.

Quizplus · Accepted Answer

BIn a consolidated balance sheet, intercompany transactions, including bonds owned by one part of the company and issued by another, are eliminated. Therefore, the $70,000 of bonds that Company P owns of Company S's bonds are eliminated. This leaves $30,000 of bonds payable to external parties, which is choice A. However, the unamortized book value of $66,000 also plays a role in the consolidation process. Since Company P has an unamortized book value of $66,000 on the $70,000 of bonds it owns, this indicates that there has been a discount on these bonds that hasn't been fully amortized. When eliminating the bonds, this unamortized amount should also be considered, leading to an adjustment that would affect the consolidated bonds payable, aligning with choice B's logic. However, the correct interpretation strictly following standard accounting consolidation principles would primarily support choice A, as it directly reflects the elimination of intercompany bond holdings. Choice B might be considered a misunderstanding of the consolidation process regarding the treatment of the unamortized book value in this context.

Company P Owns a 90% Interest in Company S