INTERCOMPANY

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CHAPTER 11

• INTERCOMPANY
• BOND HOLDINGSSECTION

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FOCUS OF CHAPTER 11

• The Constructive Retirement of the Bonds
• Calculating the Gain or Loss on Extinguishment of
  Debt

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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
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Ways to Acquire Bonds of a Group Member
Directly Indirectly

• Intercompany bond holdings can arise in two ways
• DIRECT transactionsOne member issues bonds to
  another member.
• INDIRECT transactionsOne 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.

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The Constructive Retirementof the Bonds
Reporting Results

• The constructive retirement of the bonds results
  in reporting in consolidation
• An imputed gain or lossin the periodof the
  bond acquisition.
• An nonextraordinary item (per FAS 145).
• No future interest income or interest expense on
  the intercompany bond investment or liability,
  respectively.

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Calculating the Imputed Gain or Loss Done At
the Acquisition Date

• Compare at the acquisition date
• The acquiring entitys costexcluding any amount
  related to purchased interestwith
• The issuing entitys carrying value of the
  intercompany portion of the bonds.

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Calculating the Imputed Gain or Loss Done At
the Acquisition Date

• Compare at the acquisition date
• The acquiring entitys costexcluding any amount
  related to purchased interestwith
• The issuing entitys carrying value of the
  intercompany portion of the bonds.

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Premiums and DiscountsThey Result in Gains or
Losses
It depends on which entity has the larger item.
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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
  subsidiarys premium or discount to the
  NCI(based on legal boundary realities).

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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
  subsidiarys premium or discount to the
  NCI(based on legal boundary realities).

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Simplified Procedures Eliminating Premiums and
Discounts in the G/L

• Rationale for These ProceduresSubstance Over
  Form The parent can either
• (1) Loan money to the subsidiary for it to
  retire bonds held by the parent or
• (2) Have the subsidiary lend 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.

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Review Question 1

• On 10/1/06, Pondex paid 319,000 to acquire 60
  of Sondexs 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

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Review Question 1With Answer

• On 10/1/06, Pondex paid 319,000 to acquire 60
  of Sondexs 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

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Review Question 2

• On 10/1/06, Pondex paid 319,000 to acquire 60
  of Sondexs 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

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Review Question 2With Answer

• On 10/1/06, Pondex paid 319,000 to acquire 60
  of Sondexs 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

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End of Chapter 11

• Time to Clear Things UpAny Questions?