Chapter 5 – Intercompany Bonds and Cash Flows

TeacherFor some reason, bonds was one of the more difficult topics from Intermediate Accounting.  In general, the issuance of bonds, or the investment in bonds does not create any special issues related to the consolidation of financial statements.  What happens, however, when one party to the consolidated entity purchases bonds that have been previously issued by the other party.  Your first response might be, “we should just not let that happen!  Unfortunately, however, it does happen, and creates a type of intercompany transaction.  Specifically, there is a bond payable on the books of one of the companies, and an investment in bonds on the books of the other company.  Added to this are intercompany interest revenues and interest expenses, intercompany interest payables and intercompany interest receivables, and the possibility of discount or premium amortizations.  Chapter 5 discusses the procedures necessary to eliminate all of these things.

An unrelated topic in Chapter 5 deals with intercompany leases.

For more information about both of these topics, go here.