Question

Please don't copy the already existing answer.

Subsidiary Bond Holdings

Farflung Corporation has in excess of 60 subsidiaries worldwide. It owns 65 percent of the voting common stock of Micro Company and 80 percent of the shares of Eagle Corporation. Micro sold $400,000 par value first mortgage bonds at par value on January 2, 20X0, to Independent Company. No intercorporate ownership exists between Farflung and its subsidiaries and Independent.

On December 31, 20X4, Independent determined the need for cash for other purposes and sold the Micro bonds to Eagle for $424,000. Farflung's accounting department was not aware of Eagle's bond purchase and included the Micro Company bonds among its long-term liabilities in the consolidated balance sheet prepared at December 31, 20X4.

Required:

In reviewing the financial statements of Farflung and its subsidiaries at December 31, 20X5, you discovered Eagle Corporation's investment in Micro's bonds and immediately brought it to the attention of Farflung's financial vice president. You have been asked to present your thoughts to the financial vice president detailing the appropriate reporting treatment when intercorporate bond ownership occurs in this way and to provide recommendations as to the actions, if any, Farflung should take in preparing its consolidated statements at December 31, 20X5. Are there any ethical issues that might arise under these circumstances?

Answer 1

Facts of the case are Farflung Corporation has among others two subsidiaries namely Micro Holdings (65% shareholding) and Eagle Corporation (80% shareholding).

Micro Holdings has issued first mortgage bonds to Independent organisation with which there is no intercorporate relationship. After which Independent organisation has issued the Micro bonds to Eagle corporation.

Now while preparing the consolidated financial statements of Fairflung Corporation the same bonds will be coming as long term liabilities and investments in Micro and Eagle respectively which will result in wrong presentation of financial statements and therefore while explaining to Finance Vice president, we will have to present the fact though un knowingly - this transaction will have to be eliminated as to the extent of 65% as the other will be the minority share in Micro holdings and other amount can be shown as investment in Eagle Corporation.