Question

If an affiliate purchases bonds in the open market, the book value of the intercompany bond liability at the time of purchase is

A) Always assigned to the parent company because it has control.
B) The par value of the bonds less the unamortized discount or plus the unamortized premium.
C) Par value.
D) The par value of the bonds plus the unamortized discount or less the unamortized premium.

Answer 1

The book value of an intercompany bond liability when an affiliate purchases bonds in the open market is the par value of the bonds less the unamortized discount or plus the unamortized premium.

Step-by-step explanation:

If an affiliate purchases bonds in the open market, the book value of the intercompany bond liability at the time of purchase is the par value of the bonds less the unamortized discount or plus the unamortized premium. This accounting principle is reflected in the way companies record bond transactions on their financial statements. The book value captures the actual financial position of the bond, which takes into account any discounts or premiums that have not yet been fully realized.

For instance, if a bond with a par value of $3,000 is purchased at a discount and this discount has not been fully amortized, the book value would be the par value minus the remaining discount. Conversely, if the bond was issued at a premium, the book value would be the par value plus any premium that has yet to be amortized. It's noteworthy that the present value is a related concept, representing the current worth of a future stream of cash flows, discounted back at a specific interest rate.

Answer: B) The par value of the bonds less the unamortized discount or plus the unamortized premium.