Question

A bond that had been issued by a subsidiary at a premium was acquired several years...

A bond that had been issued by a subsidiary at a premium was acquired several years ago by its parent on the market at a discount. The bond issue is still outstanding. Which of the following statements is true?

Multiple Choice

  • The bond issue has no impact on the preparation of current consolidated financial statements because the bond acquisition was made in the past.

  • The original gain would be reported in the current year’s consolidated income statement.

  • The interest income and interest expense balances exactly offset so that no adjustment to retained earnings or income is necessary.

  • For consolidated purposes, retained earnings must be increased at the beginning of the current year, but by an amount that is smaller than the original gain.

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Answer #1

A bond that had been issued by a subsidiary at a premium was acquired several years ago by its parent on the market at a discount. The bond issue is still outstanding. Which of the following statements is true?

The correct answer is-

For consolidated purposes, retained earnings must be increased at the beginning of the current year, but by an amount that is smaller than the original gain.

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