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NEW QUESTION: 1
P Co. purchased term bonds at a premium on the open market. These bonds represented
20% of the outstanding class of bonds issued at a discount by S Co., P's wholly owned subsidiary. P intends to hold the bonds until maturity. In a consolidated balance sheet, the difference between the bond carrying amounts of the two companies is:
A. Included as a decrease in retained earnings.
B. Included as an increase in 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.
Because a consolidated financial statement should include both P and S as a Single consolidated) reporting entity, the purchase of the outstanding bonds of S by Pat a premium was in substance a retirement of debt for more than the debt's carrying amount. This transaction should be reflected in the consolidated income statement for the year of the purchase as a constructive loss from the retirement of debt. Hence, the effect on the balance sheet is to decrease retained earnings by an amount equal to the premium plus the unamortized discount before the tax effect.
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