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Parent Z owns 75% of Sub QQQ. On January 1 2015, Parent Z issued 20 year...

Parent Z owns 75% of Sub QQQ. On January 1 2015, Parent Z issued 20 year notes, with face value $50,00,000,000 and a premium of 1,000,000. The premium is amortized at a rate of $50,000 per year. The debt was issued to a third party who resold it to Sub QQQ for $50,000,000 at the start of 2019. During 2019, Parent Z reported interest expense of $2,290,000 associated with this debt, and Sub QQQ reported interest income of $2,345,000 from this bond.
How should this bond be reported on the consolidated financials?
At year-end, the consolidated entity will recognize a (choose either gain or loss) [a] of amount [b] related to the constructive retirement of the debt. The consolidated income statement interest income must be (choose either increased or decreased) [c] by amount [d] and interest income will be (choose either decreased or increased) [e] by [f].

Solutions

Expert Solution

Reporting in the consolidated Balance Sheet

Reporting of Bonds Payable in consolidated balance sheet

Bonds Payable in individual balance sheet of Z Ltd= $5,00,07,50,000 (W.N. 1)

Bonds receivable in individual balance sheet of QQQ Ltd= $50,000,000

Thus, presentation of Bonds Payable in consolidated balance sheet (paybale- receivable)= $5,00,07,50,000-$50,000,000

= $4,95,07,50,000

Thus, value of bonds payable in consolidated B/S of Z Ltd= $4,95,07,50,000

Reporting of Interest income in consolidated balance sheet

Interest expense in individual balance sheet of Z Ltd= $22,40,000 (W.N.2)

Interest income in individual balance sheet of QQQ Ltd= $23,45,000

Interest income in consolidated balance sheet of Z Ltd= $2,345,000-$22,40,000= $1,05,000

Thus, interest income in consolidated balance sheet =$1,05,000

At year-end, the consolidated entity will recognize a gain of amount $50,000,000 related to the constructive retirement of the debt. The consolidated income statement interest income must be decreased by amount $22,40,000 and interest income will be decreased by $22,40,000

Workign Notes

W.N.1 Bonds Payable in individual balance sheet of Z Ltd

Bonds Payable= $5,00,00,00,000

(+) Unamortized premium= $7,50,000 (10,00,000-2,50,000)

Total Bonds Payable by Z Ltd= $5,00,07,50,000

W.N.2 Interest expense in individual balance sheet of Z Ltd

Interest expense =$22,90,000

(-) Amortization= $50,000

Total interest expense in the books of Z Ltd= $22,40,000

ekkarill92 answered 1 year ago
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