Question

Scenario

Many parent companies are sometimes faced with situations where they are forced to retire subsidiaries bonds.

Required:

Discuss in detail how a parent can effectively retire a subsidiary bond and the supporting accounting entries. (Feel free to use examples if necessary)

Answer 1

How a parent can effectively retire a subsidiary bond ?

• When the parent buys subsidiary bonds, the bonds cease to exist, from a consolidated viewpoint. They are retired on the consolidated worksheet by elimination.
• When the intercompany bonds are eliminated, there will be a difference between the amortized cost and the price paid; this creates a gain or loss on retirement.
• In periods subsequent to the intercompany purchase, the bonds must continue to be eliminated, and retained earnings is adjusted for the remaining retirement gain or loss that has not already been amortized.
• Intercompany interest expense/revenue and accrued interest receivable/payable are also eliminated.

• Subsequent to the period of purchase, the only impact of consolidations on cash flow is the added amortization and depreciation caused by the purchase.
• The parent purchase of subsidiary bonds is treated as a retirement and is a financing activity.
• Prior to calculating consolidated EPS, the subsidiary’s EPS (including dilution adjustments that add more subsidiary shares) is calculated.
• The parent’s numerator for EPS includes its own internally generated net income plus its share of subsidiary EPS.
• The parent also adjusts its numerator and denominator for dilative parent company securities and subsidiary securities that are satisfied by issuing parent company shares.
• On vertical worksheets for consolidations subsequent to acquisition, the income statement accounts appear at the top, followed by the retained earnings statement accounts, and then the balance sheet accounts.
• Net income is carried down to the retained earnings section.
• Ending retained earnings is then carried down to the balance sheet section.
• On a vertical worksheet, the eliminating and adjusting entries are the same as those on a trial balance worksheet.

Accounting Entries for retiring subsidiary companies Bond

  

The company pays out cash and removes the bond payable from its balance sheet. However, when a bond is retired before maturity a gain or loss may arise.

If there is Loss On retirement of Bond:

For example

Company L had issued $100,000 worth of bonds 2 years ago at a discount of $5,000. The current balance in the discount on bonds payable account is $4,000. The company intends to redeem the bonds for $98,000.

Carrying amount of a bond payable equals the face value of the bond less any discount or plus any premium. In this scenario the face value is $100,000 and the outstanding balance of discount on bonds payable is $4,000 which gives us a carrying amount of $96,000. Since the cash paid to redeem the bonds is $98,000 which exceeds the carrying amount of $96,000 by $2,000 the company needs to record loss of retirement of bonds of $2,000 as follows:

Bonds Payable	100000
Loss on retirement of bond	2000
To, Cash		98000
To, Discount of Bond		4000

If there is gain on retirement of bond:

Company G had issued $100,000 worth of bonds 2 years ago at a premium of $6,000. The current balance in the discount on bonds payable account is $5,000. The company intends to redeem the bonds for $102,000.

Carrying amount of a bond payable equals the face value of the bond less any discount or plus any premium. In this scenario the face value is $100,000 and the outstanding balance of premium on bonds payable is $5,000 which gives us a carrying amount of $105,000 ($100,000 plus $5,000). The cash paid to redeem the bonds is $102,000 which is lower than the carrying amount of $105,000. Company G should record a gain on early retirement of bonds of $3,000 because it was able to settle a liability for less than its carrying amount.

Bonds Payable	100000
Premium on Bond	5000
To, Cash		102000
To, gain on retirement of bond		3000