Question

DISCUSS IN DETAILS HOW A PARENT CAN EFFECTIVELY RETIRE A SUBSIDIARY BOND AND THE SUPPORTING ACCOUNTING ENTRIES

Answer 1

The parent can effectively retire subsidiary bonds by lending money to the subsidiary for the actual retirement or by buying the bonds from existing owners.

When the parent buys subsidiary bonds, the bonds cease to exist in consolidated financial statements. 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 and this gain is treated as Extraordinary and is recognized in consolidated income statement.

There are situations where the subsidiary has outstanding bonds that are held by outside parties. If the patent company wishes to retire these funds, It gives cash to its subsidiary so that the subsidiary can itself retire them. A purchase of a subsidiary for cash is in the ‘‘investing’’ section of the cash flow statement. The cash outflow is net of the cash received.

Accounting Entries:-

• To record acquisition of bonds of the subsidiary company

Investment in Subsidiary bonds Dr.

Cash A/c Cr.

• To remove intercompany bonds and related interest accounts and record loss on early extinguishment of debts

Bonds Payable A/c Dr.

Interest Income Dr.

Loss on retirement of bonds Dr.

Investment in Subsidiary company bonds credit

Interest Expense Cr.