Question

Below is the discussion question that I need to discuss this week. However, I am unsure how to proceed. The textbook we are using is focused more on the numbers than it is the theory. Your help is appreciated.

"Advanced Accounting" by Hoyle, Schaefer, Doupnik

A parent company can acquire bonds either directly from the subsidiary or from a nonaffiliate that originally acquired the subsidiary's bonds. Does it matter from whom the bonds are acquired and why?

Answer 1

1. When the parent acquires the bonds from a nonaffiliate, the bonds were originally held outside the consolidated entity and the bonds must be treated as if they were reacquired by the original issuer. In this case the bond acquisition is handled as a constructive retirement, which means the bonds are treated as if the subsidiary had retired the bonds when the consolidated financial statements are prepared. Any gain or loss on constructive retirement should be reported in the consolidated income statement but not in separate financial statements of the parent and subsidiary.

2. When the parent purchases the bonds directly from the subsidiary the transaction is viewed as an inter-company debt and must be eliminated in the preparation of the consolidated financial statements.