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CHAPTER 11

CHAPTER 11. INTERCOMPANY BOND HOLDINGS SECTION. FOCUS OF CHAPTER 11. The Constructive Retirement of the Bonds Calculating the Gain or Loss on Extinguishment of Debt. The Consolidated Perspective.

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CHAPTER 11

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  1. CHAPTER 11 INTERCOMPANY BOND HOLDINGSSECTION

  2. FOCUS OF CHAPTER 11 • The Constructive Retirement of the Bonds • Calculating the Gain or Loss on Extinguishment of Debt

  3. The Consolidated Perspective • From a consolidated viewpoint, the purchase by one member of any or all of the outstanding bonds of another member constitutes a constructive retirement of the bonds. Paxco Saxco Consolidated Group

  4. Ways to Acquire Bonds of a Group Member: Directly & Indirectly • Intercompany bond holdings can arise in two ways: • DIRECT transactions—One member issues bonds to another member. • INDIRECT transactions—One member acquires in the marketplace the outstanding bonds of another member. • The result of an indirect transaction is as if a direct transaction had occurred.

  5. The Constructive Retirementof the Bonds: Reporting Results • The constructive retirement of the bonds results in reporting in consolidation: • An imputed gain or loss—in the periodof the bond acquisition. • An nonextraordinary item (per FAS 145). • No future interest income or interest expenseon the intercompany bond investment or liability, respectively. #1 #2 #3

  6. Calculating the Imputed Gain or Loss: Done At the Acquisition Date • Compare at the acquisition date: • The acquiring entity’s cost—excluding any amount related to purchased interest—with • The issuing entity’s carrying value of the intercompany portionof the bonds.

  7. Calculating the Imputed Gain or Loss: Done At the Acquisition Date • Compare at the acquisition date: • The acquiring entity’s cost—excluding any amount related to purchased interest—with • The issuing entity’s carrying value of the intercompany portionof the bonds.

  8. Premiums and Discounts:They Result in Gains or Losses *It depends on which entity has the larger item.

  9. Partial Ownerships: Determining the NCI Share of the Gain or Loss • Three possible ways exist for assigning a portion of the imputed gain or loss to the NCI: • The Parent Company Method: Assign 100% to the parent (an arbitrary method). • The Issuing Company Method: Assign 100% to the issuing company (an arbitrary method). • The Face Value Method: Assign only the subsidiary’s premium or discount to the NCI(based on legal boundary realities). #1 #2 #3

  10. Partial Ownerships: Determining the NCI Share of the Gain or Loss • Three possible ways exist for assigning a portion of the imputed gain or loss to the NCI: • The Parent Company Method: Assign 100% to the parent (an arbitrary method). • The Issuing Company Method: Assign 100% to the issuing company (an arbitrary method). • The Face Value Method: Assign only the subsidiary’s premium or discount to the NCI(based on legal boundary realities). #1 #2 #3

  11. Simplified Procedures: Eliminating Premiums and Discounts in the G/L • Rationale for These Procedures—Substance Over Form: The parent can either • (1) Loan money to the subsidiary for it to retire bonds held by the parentor • (2) Have the subsidiarylend money to the parent for it to retire its own bonds held by the subsidiary. • The results are identical to that of eliminating the premiums and discounts in the G/L.

  12. Review Question #1 On 10/1/06, Pondex paid $319,000 to acquire 60% of Sondex’s 12% bonds having (1) a face value of $500,000 and (2) a carrying value of $520,000, (3) a maturity date of 1/1/06, and (4) semiannual interest payments(on 1/1 and 7/1). What is the 2006 consolidated reportable gain or loss?A. $1,000 loss. B. $7,000 loss. C. $2,000 gainD. $11,000 gain

  13. Review Question #1With Answer On 10/1/06, Pondex paid $319,000 to acquire 60% of Sondex’s 12% bonds having (1) a face value of $500,000 and (2) a carrying value of $520,000, (3) a maturity date of 1/1/06, and (4) semiannual interest payments(on 1/1 and 7/1). What is the 2006 consolidated reportable gain or loss?A. $1,000 loss. B. $7,000 loss. C. $2,000 gain ([$520,000 x 60%] - [$319,000 - $9,000 for interest])D. $11,000 gain

  14. Review Question #2 On 10/1/06, Pondex paid $319,000 to acquire 60% of Sondex’s 12% bonds having (1) a face value of $500,000 and (2) a carrying value of $520,000, (3) a maturity date of 1/3/06, and (4) semiannual interest payments(on 7/1 and 1/1). What is the unrealized gain at 12/31/06?A. $ -0- B. $500 C. $1,500 D. $2,000

  15. Review Question #2With Answer On 10/1/06, Pondex paid $319,000 to acquire 60% of Sondex’s 12% bonds having (1) a face value of $500,000 and (2) a carrying value of $520,000, (3) a maturity date of 1/3/06, and (4) semiannual interest payments(on 7/1 and 1/1). What is the unrealized gain at 12/31/06?A. $ -0- B. $500 C. $1,500 ($2,000 x 3/4 unexpired)D. $2,000

  16. End of Chapter 11 • Time to Clear Things Up—Any Questions?

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