Company S is a 100%-owned subsidiary of Company P.On January 1, 2016, Company S has $100,000 of 8% face rate bonds outstanding.The bonds had 5 years to maturity on January 1, 2016, and had an unamortized discount of $5,000.On that date, Company P purchased the bonds for $99,000.The net adjustment needed to consolidate retained earnings on December 31, 2016 is ____.

Question

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Since Company P purchased Company S's bonds, the intercompany debt must be eliminated. Therefore, any discount or premium on the bonds should be amortized and eliminated against the intercompany notes payable account as part of the elimination process. As of December 31, 2016, the bonds would have been outstanding for one year (out of its original five-year term) and the unamortized bond discount as of January 1, 2016 was $5,000. The annual amortization of the bond discount is $1,000 (=$5,000/5 years). Therefore, as of December 31, 2016, the unamortized bond discount is $4,000 ($5,000 - $1,000). However, this balance should be eliminated against the intercompany notes payable account, leaving no net adjustment to consolidated retained earnings. Thus, the answer is D) $0.

Company S Is a 100%-Owned Subsidiary of Company P