Question

1. Explain what is intercompany bonds and explain how it is accounted for in the financial statement.

2. Explain what is intercompany leases and eplain are accounted for in the Financial Statements.

Answer 1

Inter company bonds :

When bonds are issued within a parent company and its subsidiary it is known as intercompany bonds . The case where bonds are issued within the units of the same entity is also called intercompany bonds.

Accounting :

• When the bonds are issued the the investor and the issuer record the journal entries in their independent accounts
• journal entries are:

	issuer
issue of bond	particulars debit credit cash xxx bonds payable xxx
interest payment on bond	particulars debit credit interest expense xxx cash xxx

	investor
issue of bond	particulars debit credit bonds payable xxx cash xxx
interest payment on bond	particulars debit credit cash xxx interest expense xxx

from the above table it is seen that the enties are mutually compensating if the issuer and investor are the same therefore it has to be cancelled in consolidation.

• While consolidating the accounts of parent and subsidiary the inter company bond issue must be eliminated as company cannot show investment in its own bonds or its own liability. the entries pertaining to issue of bonds its interest should be cancelled. Any amount of recievable or payable relating to inter company bond reflected in balancesheet must also be eliminated.

elimination entries:

particulars	journal entry
eliminate intercompany bond holding	particulars debit credit bonds payable xxx investment in bond xxx
eliminate intercompany bond holding interest ( relating to the income statement)	particulars debit credit interest income xxx interest expense xxx
eliminate intercompany bond holding interest ( relating to the balance sheet)	particulars debit credit interest payable xxx interest recievable xxx

inter company lease:

This is the case of leasing between the parent and subsidiary company. In the individual income statements and balancesheet the terms of leasing are incorporated as normal leasing entries , whereas as in the consolidated financial statements the leasing entries are to be eliminated

the elimination entries are:

(a) operating lease

elimination of lease expenses and revenues	particulars debit credit lease revenue xxx lease expense xxx
elimination of lease payables and recievables	particulars debit credit lease recievables xxx lease payables xxx
reclassifying the leased equipment	articulars debit credit equipment xxx accumulated depreciation on leased equipment xxx leased equipment xxx accumulated depreciation on equipment xxx

(b) finance lease

it is treated as purchase of the asset from lessor. it is taken as inter company sale of depreciable asset therefore while consolidating the lease should be totally eliminated.