Hello and welcome to this session in which we would look at inter-company transaction specifically that deals with bonds. In the prior session we looked at inventory transaction, depreciable fixed asset and non-depreciable fixed assets such as land. In this session we'll focus on bond transaction. Now this session is designed for CPA candidate rather than advanced accounting students. If you want more in-depth about this topic please go to farhat-lectures.com and look at my advanced accounting course. So what are we discussing here when we discuss bond transaction? It's whenever a company acquires a bond of another affiliate purchased bond of another affiliate of another company but that company happens to be in the same consolidated group and they happen to buy it from a third party usually the market. The bonds are considered retired and any gain or loss on the retirement should be recognized in the consolidated financial statement and maybe a picture will illustrate this concept. We have a parent company and we have a sub so let's assume the sub sold issued a bond to someone and they borrowed money so they issued the bond so the bond is with this party. Then here comes the parent company they buy the bond back and they bring the bond back to the affiliate. Well basically retired the bond. Why? Because now the consolidated group basically paid off the bond. Why? Because the sub received money and now they have a debt then the parent company eliminated the debt. Why? Because they bought the bond themselves so they receive money now the affiliate which is the parent company paid off the debt. So let's take a look at an example to illustrate this concept. Assume that company A, B are both affiliates of company C. On December 5th year 3 company A bought a bond from the market for 1,075,000 and it turns out that those bonds were issued by company B their affiliate and they were issued for 950,000 on December 1st of the same year and the face value of those bonds is a million. Prepare the eliminating journal entries required for the consolidation purpose. Before we prepare the consolidated journal entries, most likely you are a CPA candidate watching this lecture. I'm glad you are and you have arrived. You're looking for some help and far hat lectures can help you. I provide you additional resources, lectures, multiple choice that are aligned with your CPA review course. Please connect with me on LinkedIn, like this recording, share it with other connected me on Instagram, Facebook, Twitter, Reddit and group me. So let's take a look at the transaction from companies the issuing company which is company B. So company B issued a bond for a million dollar that's the face value of the bond they will credit bonds payable. They received cash 950,000 and they have a discount of 50,000. That's from company B the issuer the company that borrowed the money. Now company A purchased the bond and they happen to purchase it for 1 million and 75,000. So they will debit an investment in bonds which is an asset and they will credit cash. Simply put what happened they bought the bond and they're hoping to get interest. Now in my advanced accounting course if you're looking for more advanced entries we might have to account for the interest payment. We might have to account for the discount or the amortization, the discount or the premium amortization. For the CPA you just need to know the basic journal entries but if you need more please go to farhatlectures.com but let me go ahead and show you the journal entry. Once company A buys the bond simply the bond is retired. What does that mean? It means look they borrowed the money. Now company A paid the money to retire the bond. So technically the bond is gone. The bond is no longer with an outside party because they bought the bond. Well what's going to happen is this. We have to eliminate the bond. We have to debit bonds payable and notice what happened. Now this is not really a realistic example but the point is is the same. We paid 1 million 75 for a bond that's worth how much on the books it's only worth 950,000 which is the face value of the bond minus any an amortized premium happened to be 950. Now on the CPA exam they might tell you you purchased it after two years. Well if you purchased it after two years you have to reduce your discount by that amount. Let's assume two years later just for the sake of illustration the amortization was only 45,000 remaining. I'm sorry the discount remaining was 45. We only amortized $5,000. Then then this bond will have a value of 955. So be careful. Here I'm keeping it as simple as possible but if you understand how bonds work then you understand that the book value is the face value minus any discount but we happen to keep the discount at 950. Therefore the company incurred a loss. Why? Because the book value the book value is 950. The book value for our example is 950 and we purchased it for 1 million and 75. Well we have a loss of 125,000 and the loss goes to what? To the income statement. The loss goes to the income statement. Now obviously we also have to if we retire the bond remember every time you retire the bond you have to get rid of the discount because the discount comes with it then you credit the discount for 50,000. It happens to be 50,000. The discount could be something else. The discount could be anything but also in that case the loss will be different or the gain will be different. Then obviously we paid cash of 1 million and 75. You credit the cash and what happened here is basically everything cancelled each other cancelled each other. The investment is gone. Notice we the investment is gone. The bonds payable the bonds payable is gone. The discount is gone and in this whole thing we are worst off 125,000 as an affiliate. Why? Because we paid notice here we paid cash 1 million and 75 and when we borrowed the money we borrowed it at 950. Now I kept this example simple. I did not involve interest. I did not involve amortization because usually on the CPA exam they keep it simple when it comes to bond transaction. Bear in mind the premium or the discount reported in the books of the parent and the subsidiaries along with any related amortization are eliminated when preparing the consolidated financial statement because technically the loan the bond is no longer on our books. It's gone. What should you do now? Go to farnhathlectures.com and work MCQ's multiple choice questions. Look at additional exercises because consolidation is important. Intercompany transaction is important. Good luck. Study hard and if you're not a subscriber invest in yourself and subscribe and stay safe.