The Accounting Problems Encountered in Consolidated Intra-Entity Debt Transactions When

question 112

Multiple Choice

The accounting problems encountered in consolidated intra-entity debt transactions when the debt is acquired by an affiliate from an outside party include all of the following except:

• A) Both the investment and debt accounts have to be eliminated now and for each future consolidated financial statement despite containing differing balances.
• B) Subsequent interest revenue/expense must be removed although these balances fail to agree in amount.
• C) A gain or loss must be recognized by both parent and subsidiary companies.
• D) Changes in the investment, debt, interest revenue, and interest expense accounts occur constantly because of the amortization process.
• E) The gain or loss on the retirement of the debt must be recognized by the business combination in the year the debt is acquired, even though this balance does not appear on the financial records of either company.

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Definitions:

Bonds

These are fixed-income investment products where an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate.

Debt Instruments

Financial assets that represent a debtor's obligation to repay borrowed money or other forms of credit to the creditor according to stated terms.

Original Issue Discount

The difference between the par (face) value of a bond and the lower price at which it was originally sold, which must be reported as interest income over the life of the bond.

Tax-exempt Debt

Debt securities issued by state or municipal governments whose interest payments are exempt from federal income tax, and sometimes state and local taxes.