Question 1. The usual impetus for tran

29 Jun Question 1. The usual impetus for tran

QuestionQuestion
1. The usual impetus for tran
1. The usual impetus for transactions that create a long-term debtor-creditor relationship between members of a consolidated group is due to the:

a. subsidiary’s ability to borrow larger amounts of capital at more favorable terms than would be available to the parent.

b. parent’s ability to borrow larger amounts of capital at more favorable terms than would be available to the subsidiary.

c. parent’s desire to decentralize asset management and credit control.

d. parent’s desire to eliminate long-term debt.

2. The motivation of a parent company to purchase the outstanding bonds of

a subsidiary could be to:

a. replace the existing debt with new debt at a lower interest rate.

b. reduce the parent company’s acquisition price for the subsidiary.

c. increase the parent company’s ownership percentage in the subsidiary.

d. create interest revenue to offset interest expense in future income statements.

3. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 8%, 10-year bonds sold to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at a price that reflected the current 9% effective interest rate. How should this event be reflected in the current year’s consolidated statements?

a. The bonds remain in the balance sheet and are accounted for at a 7% effective rate.

b. The bonds remain in the balance sheet and are accounted for at a 9% effective rate.

c. Retirement of the bonds at an extraordinary gain as of the purchase date.

d. Retirement of the bonds at an extraordinary loss as of the purchase date.

Chapter 5

4. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 6%, 10-year bonds sold to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at a price that reflected the current 9% effective interest rate. How should this event be reflected in the current year’s consolidated statements?

a. The bonds remain in the balance sheet and are accounted for at a 7% effective rate.

b. The bonds remain in the balance sheet and are accounted for at a 9% effective rate.

c. Retirement of the bonds at an extraordinary gain as of the purchase date.

d. Retirement of the bonds at an extraordinary loss as of the purchase date.

5. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 6%, 10-year bonds sold to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at a price that reflected the current 6% effective interest rate. How should this event be reflected in the current year’s consolidated statements?

a. The bonds remain in the balance sheet and are accounted for at a 7% effective rate.

b. The bonds remain in the balance sheet and are accounted for at a 9% effective rate.

c. Retirement of the bonds at an extraordinary gain as of the purchase date.

d. Retirement of the bonds at an extraordinary loss as of the purchase date.

6. Intercompany debt which must be eliminated from consolidated financial statements may results from:

a. one member of a consolidated group selling its bonds directly to another member of the group.

b. one member of a consolidated group advancing funds to another member of the group so that the member may retire bonds it had issued to outside parties.

c. one member of a consolidated group purchasing bonds from outside parties as an investment that had been issued to outside parities by another member of the group.

d. all of the above.

5-2

Chapter 5

7. Elimination procedures for intercompany bonds purchased from outside parties by another member of the consolidated group are:

a. not needed except in the period of acquisition if purchased at par.

b. not needed except in the period of acquisition if purchased at a premium or discount.

c. not needed except in the period of acquisition if only a portion of the outstanding bonds are purchased.

d. needed each period as long as there are intercompany bonds.

8. Assuming the correct bond eliminations entry(s) are made for intercompany bonds, intercompany bond interest expense will appear on:

a. the consolidated income statement.

b. the income statement of the bond issuer.

c. the income statement of the bond purchaser.

d. none of the above.

9. Assuming the correct bond eliminations entry(s) are made for intercompany bonds, intercompany bond interest payable will appear on:

a. the consolidated balance sheet.

b. the balance sheet of the bond issuer.

c. the balance sheets of the bond issuer and the bond purchaser.

d. none of the above.

10. Company S is a 100%-owned subsidiary of Company P. On January 1, 20X9, Company S has $200,000 of 8% face rate bonds outstanding, which were issued at face value. The bonds had 5 years to maturity on January 1, 20X9. Premiums or discounts would be amortized on a straight-line basis. On that date, Company P purchased the bonds for $198,000. The amount on the consolidated balance sheet relative to the debt is:

a. bonds payable $200,000.

b. bonds payable $200,000, discount $2,000.

c. bonds payable $200,000, discount $1,600.

d. The bonds do not appear on the balance sheet.

11. Company S is a 100%-owned subsidiary of Company P. On January 1, 20X9, Company S has $100,000 of 8% face rate bonds outstanding. The bonds had 5 years to maturity on January 1, 20X9, and had an amortized discount of $5,000. On that date, Company P purchased the bonds for $99,000. The net adjustment needed to consolidate retained earnings on December 31, 20X9 is __________.

a. $(4,000)

b. $(3,200)