Question

Portuguese owns 80 percent of the common stock of Spanish Company. Portuguese also purchases some of Spanish's bonds directly from Spanish and holds the bonds as a long-term investment. How is the acquisition of the bonds treated for consolidated reporting purposes

Answer 1

Answer:

Since Portuguese Company owns 80% of Spanish Company, all inter-company transactions must not be included in the consolidated balance sheet. This means that Portuguese's balance sheet should not include anything related to the purchase of Spanish's bonds.

If Portuguese Company had acquired the bonds from an unrelated third party, then that would be considered a retirement of bonds, but here Portuguese bought the bonds directly from Spanish.