Chapter 8, Problem 8.8Q

To determine

Bond sale directly to an affiliate: When intercompany sale of bonds takes place between affiliates, all effects of intercompany indebtedness must be eliminated for the purpose of consolidated financial statements. As a company cannot report an investment in its own bonds or bond liability to itself. Thus when the consolidated entity is viewed as a single company all amounts related to intercompany indebtedness are eliminated.

To explain : The effect of eliminating intercompany interest income and expense on consolidated net income when loss on bond has been reported in a prior year.