What is Intercompany bond transactions?
In short
When one company in a consolidated group buys another member's bonds from outside investors, the consolidated statements treat the bonds as retired. The gain or loss on this constructive retirement is recognized in consolidated income in the year of purchase.
Key takeaways
- The gain or loss is the bonds' carrying amount on the issuer's books minus the price the affiliate paid.
- The investment, the bonds payable and the related interest income and expense are eliminated.
- The individual companies recognize the gain or loss gradually through interest in later years.
Where it's tested
BAR: Business Combinations (Advanced) — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A parent buys its subsidiary's bonds from outside investors for $940,000. The bonds have a carrying amount of $970,000 on the subsidiary's books. In the consolidated statements, this is treated as: