Bilson Ltd. is the wholly-owned subsidiary of Lawson Ltd. Bilson purchased all of Lawson'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?

Question

Quizplus · Accepted Answer

Since Bilson is a wholly-owned subsidiary of Lawson, its financial statements are consolidated with Lawson's financial statements. Therefore, the gain resulting from the purchase of the bonds will only appear on the consolidated statement of comprehensive income, not on Lawson's separate-entity statement of comprehensive income. The gain should be recognized in the period in which the transaction occurs as a gain on extinguishment of debt. It should not be added to the value of the bonds payable, as it represents a gain on the retirement of the debt, not an increase in the value of the debt.