Question

Toy Company is a wholly owned subsidiary of Parks Company. On January 1 of the current year, Toy Company has $100,000 of 8% bonds outstanding that were issued at face value and have five years to maturity. Both Toy Company and Parks amortize any premium or discount using the straight-line method. On January 1 of the next year, Parks will purchase Toy Company's bonds for $96,000.

How should this transaction be reflected in the consolidated financial statements in the year that Parks acquires the bonds?

Answer 1

In consolidated financial statements, Parks Company's purchase of Toy Company's bonds at a discount will result in the elimination of the bond liability and potentially a gain recognized due to the extinguishment of debt, with any unamortized discount or premium accounted for accordingly.

Step-by-step explanation:

When Parks Company acquires the bonds of its wholly owned subsidiary, Toy Company, for $96,000 when they were initially issued at $100,000, this transaction has specific implications for the preparation of consolidated financial statements. In a consolidated financial statement, intercompany transactions are eliminated, so the parent company's purchase of the bonds would not be treated as an investment, but rather as a retirement of the debt. However, since the bonds were acquired at a price less than their face value, this will lead to a gain due to extinguishment of debt.

On the consolidated balance sheet, the bond liability would be removed, and any difference between the carrying amount of the bonds and the purchase price would be recognized as gain or loss in the consolidated income statement. The straight-line amortization method would be used, if applicable, to account for any premium or discount on the bond prior to its acquisition by the parent company. At the date of the bond's acquisition by Parks Company, if any unamortized discount or premium exists, it should be accounted for accordingly in the consolidation process.