Question

Consolidated gain or loss on constructive retirement of debt

Assume that a Parent Company owns 100 percent of its Subsidiary. Each of the following independent scenarios describes an intercompany bond transaction between the Parent and the Subsidiary. For each independent case, determine the amount of gain or loss on constructive retirement of the bond reported in the consolidated income statement for the year ended December 31, 2019. Assume straight-line amortization.

a. On June 30, 2019, P issues directly to S bonds that have a par value of $80,000. S paid $83,200 for the bonds. The term of the bonds is 10 years and they have an 8 percent stated interest rate. Interest is paid annually on December 31.

b. On January 1, 2015, P issues to an unaffiliated company bonds that have a par value of $80,000. The unaffiliated company paid par value for the bonds. On December 31, 2019, S paid $56,000 for 70 percent of the outstanding bonds. The bond term is 10 years and they have an 8 percent stated interest rate. Interest is paid annually on December 31.

c. On January 1, 2015, P issues to an unaffiliated company bonds that have a par value of $80,000. The unaffiliated company paid 103 percent of par value for the bonds. Five years later, S paid $76,000 for all of the outstanding bonds. The bond term is 10 years and they have an 8 percent stated interest rate. Interest is paid annually on December 31.

d. On January 1, 2015, S issues to an unaffiliated company bonds that have a par value of $80,000. The unaffiliated company paid 96 percent of par value for the bonds. Five years later, P paid $57,680 for 70 percent of the outstanding bonds. The bond term is 10 years and they have an 8 percent stated interest rate. Interest is paid annually on December 31.

Note: If there is no gain or loss, enter zero for the amount and select N/A for Gain or Loss answer.
Do not use negative signs with any of your answers.

Case	Amount	Gain or Loss
a.	Answer	Answer/GainLoss/N/A
b.	Answer	AnswerGain/Loss/N/A
c.	Answer	AnswerGain/Loss/N/A
d.	Answer	AnswerGain/Loss/N/A

Answer 1

CONSOLIDATED GAIN OR LOSS ON CONSTRUCTIVE RETIREMENT OF BONDS:

1. There will be no gain or loss  because bond is redeemed on maturity date.

2. No gain or loss. Since the bond is issued at par value i.e, $ 80,000 .On 31st December 2019, S paid $56,000 for 70 % of outstanding value which is just equal to its value at that date.

3. There will be a gain of $ 5,200

SINCE the unaffiliated company pays 103 % of par value = $ 82,400

premium on issuance = $ 2,400

By using straight line amortization

= $ 240 ( 2400/ 10 ) will be the amount that is subtracted from the 82,400per year to redeem the bond at par.

AFTER FIVE YEARS :

Face value of bond= 80,000 AND balance of premium outstanding = 1200

Carrying amount of bond ( after five year ) = 80,000+ 1,200 = $ 81,200

Amount paid by S for all outstanding bond = 76,000

Gain on  purchase by S = 81,200 - 76,000 = $ 5,200

4. There will be a loss of $ 2,800

SINCE the unaffiliated company 96 % of par value = $ 76,800 (80,000* 96%)

discount on issuance = $ 3,200

By using straight line amortization

= $ 320 ( 3,200 / 10 ) will be the amount that is to be added  to $ 76,800 to redeem the bond at par.

AFTER FIVE YEARS :

Face value of bond= 80,000 AND outstanding balance of discount on  bonds = 1,600

Carrying amount of bond ( after five year ) = 80,000- 1,600 = $ 78,400

70% of the oustanding bond = 70 % * 78,400 = 54,880

Amount paid by P for 70% outstanding bond = $ 57,680

LOSS on  purchase by P = 57,680- 54,880 = $ 2,800