Question

Several years ago, Bennett, Inc., bought a portion of the outstanding bonds of Smith Corporation, a subsidiary organization. The acquisition was made from an outside party. In the current year, how should these intra-entity bonds be accounted for within the consolidation process?

A. The intra-entity bonds should be eliminated in consolidation.
B. The intra-entity bonds should be carried at their book value in the consolidated financial statements.
C. The intra-entity bonds should be carried at their fair value in the consolidated financial statements.
D. The intra-entity bonds should be carried at their acquisition cost in the consolidated financial statements.

Answer 1

In the consolidation process, intra-entity bonds should be carried at their fair value in the consolidated financial statements.

Step-by-step explanation:

In the consolidation process, the intra-entity bonds acquired by Bennett Inc. from an outside party should be accounted for at their fair value in the consolidated financial statements. Option C is the correct answer.

When consolidating financial statements, bonds are typically carried at their fair value. This ensures that the consolidated financial statements reflect the true economic value of the intra-entity bonds. Book value (option B) and acquisition cost (option D) may not accurately represent the fair value of the bonds.

It is important to eliminate any intra-entity transactions or balances when consolidating financial statements, but in this case, the intra-entity bonds should be carried at their fair value.