Intercompany Bonds

Question 1

When do intercompany bonds exist?

Answer 1

When one affiliate owns (as an investment) the bonds issued by another affiliate (a liability)

Question 2

What eliminating entry would be required for consolidating purposes immediately following an intercompany bond purchase that involved a discount on bonds payable and a premium on bond investment?

Answer 2

DR: Bonds Payableat face amount
    Loss on Constructive Retirement
    - sum of Premium on B/I + Discount on B/P
    CR: Investment in I/C Bonds
        at face amount
    CR: Premium on I/C Bond Investment - for full amount
         - for full amount
    CR: Discount on I/C Bonds Payable
         - for I/C amount

Question 3

For consolidated purposes, what accounts can be affected by intercompany bonds?

Answer 3

Bonds payable
Premium or discount on bonds payable
Investment in bonds
Premium or discount on investment in bonds
Interest income/interest expense
Interest payable/interest receivable

Question 4

What determines the amount of any net gain or loss resulting from bonds becoming intercompany?

Answer 4

The sum or difference between the premium or discount on the bond investment (of the buying affiliate) and the premium or discount on the bonds payable (of the issuing affiliate). 
Gain would result from eliminating:
Premium on bond payable or
Discount on investment
Loss would result from eliminating:
Discount on bond payable or
Premium on Investment

Question 5

What are two objective differences between U.S. generally accepted account principles (GAAP) and International Financial Reporting Standards (IFRS) in determining control?

Answer 5

1. )Under U.S. GAAP, only outstanding voting rights are used to measure control. Under IFRS, securities currently exercisable or convertible into voting rights are used in assessing control.
2. )Under U.S. GAAP, only if an entity has more than 50% voting ownership can it have control. Under IFRS, an entity may have control even when it does not have more than 50% voting control