Chapter 8, Problem 8.4E

Evaluation of Intercorporate Bond Holdings (Effective Interest Method)
Proctor Corporation purchased bonds of its subsidiary from a nonaffiliated during 20X6. Although Proctor purchased the bonds at par value, a loss on bond retirement is reported in the 20X6 consolidated income statement as a result of the purchase.

Required

1. Were the bonds originally sold by the subsidiary at a premium or a discount? Explain.
2. Will the annual interest payments? Proctor receives be more or less than the interest expense the subsidiary records each period? Explain.
3. As a result of the entry recorded at December 31, 20X7, to eliminate the effects of the intercompany bond holding, will consolidated net income be increased or decreased? Explain.