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12. Pittsford Company purchased bonds from Shay Company on the open market at a premium. Shay...

12. Pittsford Company purchased bonds from Shay Company on the open market at a premium. Shay Company is a 100% owned subsidiary of Pittsford Company. Pittsford intends to hold the bonds until maturity. In a consolidated balance sheet, the difference between the bond carrying values in the two companies would be: a. included as a decrease to retained earnings. b. included as an increase to retained earnings. c. reported as a deferred debit to be amortized over the remaining life of the bonds. d. reported as a deferred credit to be amortized over the remaining life of the bonds.

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Answer #1

If a discount or a premium was recorded when the bonds were issued, the amount must be amortized over the life of the bonds.

From the Parents point of view, it would be recorded as an asset at cost plus premium i.e. 110(100+10). From a subsidiaries point of view it would be record as a Liability at cost i.e 100. Thus resulting in a difference in carrying value of 10.

This they would be reported as a deferred credit to be amortized over the remaining life of the bonds

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