Question

A subsidiary issues bonds directly to its parent at a discount. Both use the same amortization...

A subsidiary issues bonds directly to its parent at a discount. Both use the same amortization method. Which of the following statements is true?

A, Since the bond was issued by the subsidiary, the amount for non-controlling interest must be affected.

B, Because of the discount, the bond interest accounts on the two sets of financial statements will not agree.

C, Bond interest income and expense will be equal in amount and must be eliminated when preparing the consolidated income statement.

D, Elimination is not necessary for consolidation purposes because the bond was acquired directly from the subsidiary.

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Answer #1

Answer: C, Bond interest income and expense will be equal in amount and must be eliminated when preparing the consolidated income statement.

Explanation:

When a subsidiary issues bonds directly to its parent, it is called direct intercompany debt Consolidated financial statement have no impact from such transaction as the bond interest income of the subsidiary will be equal to the bond interest expense of the parent. Thus those entries will be eliminated when preparing the consolidated income statement   

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