Chapter 9 CHAPTER NINE – INTERCOMPANY BOND HOLDINGS AND MISCELLANEOUS TOPICS -- CONSOLIDATED FINANCIAL STATEMENTS In this chapter, we discuss several areas related to the preparation of consolidated financial statements, including: 1. Intercompany bond holdings. 2. Intercompany notes receivable discounted. 3. Stock dividends issued by a subsidiary company. 4. Cash dividends from preacquisition earnings. 5. Preferred stock of a subsidiary. As in previous chapters, the differences in the concepts and eliminating entries required under the three methods of accounting for investments (cost, partial equity, and complete equity) are relatively few. Reciprocity entries, shown in the illustrations in this outline, are not needed under the equity method (partial or complete). Further, eliminating entries that must be made under the cost and partial equity methods to the parent company’s beginning retained earnings account to adjust for prior year earnings effects are not needed under the complete equity method; those adjustments have been reflected in the parent’s equity in subsidiary income and hence in retained earnings in previous years. In their place, the correct entry is to the account Investment in S Company (for firms using the complete equity method) to facilitate the elimination of the investment account. I. INTERCOMPANY BOND HOLDINGS An affiliate company may purchase bonds issued by another affiliate directly from the issuing company or from outsiders after the original issue. In either case, because the bonds are held within the affiliated group, the intercompany bond investment (a receivable) and the bonds payable (a liability), along with any related intercompany interest expense and interest revenue, must be eliminated. A. ACCOUNTING FOR BONDS - A REVIEW 1. Bonds are issued at a discount when proceeds are less than face value. The amortization of bond discount over the life of the bonds increases periodic interest expense. 2. Bonds are issued at a premium when proceeds are more than face value. The amortization of bond premium over the life of the bonds reduces periodic interest expense. B. ACCOUNTING FOR BONDS ON BOOKS OF AFFILIATES 1. The purchase of an affiliate’s bonds does not alter the accounting on the books of the individual companies. The
purchase is recorded as if it were made from an independent party. 2. When P Co. buys S Co. bonds, S Co. does not book a gain or loss on early retirement of debt. 3. However, once we assume a consolidated entity, when P Co. purchases the bonds, it is the same as if S Co. had brought their own bonds back, and a constructive extraordinary gain or loss must be recognized for consolidation purposes. 4. The consolidated entity thus recognizes the gain or loss before it is recognized by the legal entity.
- Fall '13
- Dividend, Generally Accepted Accounting Principles, Co., S Co