[jking12]

I’ve been having trouble with a few intercompany transaction problems, and I think Becker does a poor job of explaining the process for solving this problem, any help is appreciated!

P Company purchased term bonds at a premium on the open market. These bonds represent 20% of the outstanding class of bonds issued at a discount by S Company, P’s wholly owned subsidiary. P intends to hold these bonds until maturity. In a consolidated BS, the difference between the bond carrying amounts in the two companies would be:

a. Included as a decrease to RE

b. Included as an increase in RE

c. Reported as a deferred debit to be amortized over the remaining life of the bonds.

d. Reported as a deferred credit to be amortized over the remaining life of the bonds.

Correct answer: a

Should this problem be treated as a Workpaper elimination entry? If so, I thought it would look like this:

Dr. Bonds Payable

Dr. Premium

Cr. Investment in Bonds

Cr. Gain on extinguishment of bonds (RE)

The gain would increase RE so that’s why I answered b not a.

Again, Becker’s explanation doesn’t make much sense to me so any help would be awesome!

FAR - (8/2012) 87
BEC - (11/2012) 86
REG - 73 (retake July 2013)
AUD - 71 (retake April 2013)