Poodle Company owns 80 percent of the common stock of Shepherd Inc. Poodle acquires some of Shepherd's bonds from an unrelated party for less than the carrying value on Shepherd's books and holds them as a long-term investment. For consolidated reporting purposes, how is the acquisition of Shepherd's bonds treated?

Complete Question:

Poodle Company owns 80 percent of the common stock of Sheperd Inc. Poodle acquires some of Sheperds' bonds from an unrelated party for less than the carrying value on Sheperds' books and holds them as a long-term investment. For consolidated reporting purposes, how is the acquisition of Sheperds' bonds treated?  

As a decrease in the Bonds Payable account on Sheperds' books.

As an increase in noncurrent assets.  

Everything related to the bonds is eliminated in the consolidation worksheet, and nothing related to the bonds appears in the consolidated financial statements.  

As a retirement of bonds.

A loss on the constructive retirement of a parent's bonds by a subsidiary is effectively recognized in the individual accounting records of the parent and its subsidiary:  

I. at the date of constructive retirement.

II. over the remaining term of the bonds.

I  

II

Both I and II

Neither I nor II

When one company purchases the debt of an affiliate from an unrelated party, a gain or loss on the constructive retirement of debt is recognized by which of the following?

              Issuing  Affiliate     Purchasing Affiliate     Consolidated  Entity

A.             No                         No                                 Yes

B.             Yes                       Yes                                 No

C.             No                         No                                  No

D.             Yes                        Yes                                Yes

Option A  

Option B  

Option C

Option D  

Which of the following statements is(are) correct?

I. The amount assigned to the noncontrolling interest may be affected by a constructive retirement of bonds.

II. A constructive retirement of bonds normally results in an extraordinary gain or loss.

III. In constructive retirement, the entity would still consider the bonds outstanding, even though they are treated as if they were retired in preparing consolidated financial statements.

I  

II

I and III

I, II, and III

1. For consolidated reporting purposes, Company M's bonds will be treated as a retirement of bonds.

2. For consolidated reporting purposes, everything related to the intercompany bonds is eliminated in the consolidation worksheet, and nothing related to the bonds appears in the consolidated financial statements.

3. A loss on the constructive retirement of a parent's bonds by a subsidiary is effectively recognized in the individual accounting records of the parent and its subsidiary:

I. at the date of constructive retirement.

II. over the remaining term of the bonds.

Both I and II

4. When one company purchases the debt of an affiliate from an unrelated party, a gain or loss on the constructive retirement of debt is recognized by

Option A

5. The incorrect statement is:

I. The amount assigned to the noncontrolling interest may be affected by a constructive retirement of bonds.

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