Question

A parent company buys bonds on the open market that had been previously issued by its subsidiary. The price paid by the parent is less than the book value of the bonds on the subsidiary’s records. How should the parent report the difference between the price paid and the book value of the bonds on its consolidated financial statements?

A) As a loss on retirement of the bondsB) As a gain on retirement of the bondsC) As an increase to interest expense over the remaining life of the bondsD) Because the bonds now represent intra-entity debt, the difference is not reported.

Answer 1

B) As a gain on retirement of the bonds

Step-by-step explanation:

A corporation should record a gain on retirement of bonds when it buys back bonds that it has issued before at a lower price than the recorded liability (par value).

Since the parent company consolidated its financial records with the subsidiary, any bond issued by the subsidiary is considered as being issued by the parent company.