Question

Which of the following statements is true ?

	a.	The constructive gain or loss from the subsidiary’s purchase of all or part of the parent’s outstanding bonds will appear in the consolidated income statement in the year the subsidiary purchased the bonds.
	b.	A parent company is not allowed to issue bonds directly to its subsidiary company since the SEC does not permit a subsidiary to loan money directly to its parent company.
	c.	The purchasing affiliate receives no interest on intercompany bonds that have been constructively retired, because any intercompany interest receivable has been eliminated in a worksheet entry.
	d.	If half of a parent company’s outstanding bonds are held by its subsidiary for the entire year, then none of the interest payable on the parent’s balance sheet will be eliminated in the consolidation worksheet because the payable represents an actual future cash transfer that must be made by the parent.

Answer 1

The constructive gain or loss on purchase of bonds by the subsidiary of the parent's company shall be eliminated. So, the statement (a) is false.

A parent company may issue bonds directly to the subsidiary. However, they shall nit issue shares directly to the subsidiary. So, the statement (b) is false.

The mutual company owings shall be eliminated in the consolidated worksheet. So, the interest payable in the parents Balance sheet will get eliminated in the consolidated worksheet even though there is future cash flow occuring. So, the statement (d) is false.

Hence, the answer is Statement (c) which is true.