Advanced Accounting Chapter 7 EXAM 100% solved

Advanced Accounting Chapter 7 EXAM 100% solved Why are consolidated financial statements prepared? - ANSWERfor the Parent Company's investors & creditors. Consolidated statements should reflect a faithful representation of the combined entity's financial position and results of operations, since the Parent became the majority owner of the Subsidiary. What is the effect on the consolidated liabilities when an affiliate (parent/subsidiary) company purchases another affiliate's bonds? - ANSWERthe transaction is treated as if the issuing company purchased and retired their own bonds for consolidation purposes, i.e., reduce the liability for the amount acquired via an intercompany transaction How is the price of bonds determined? Hint: Think about future cash flows - ANSWERThe issue price of a bond is the present value of future cash flows, i.e., the present value of principal and interest amounts to be paid in the future. The present value depends on the timing of cash flow(s) and the effective interest rate. The effective rate is influenced by the risk of default and current interest rates as determined by prevailing economic conditions. Note well: Bond's future cash flows = semi-annual interest payments + return of principal. What happens to the fair value of a bond payable when he market interest rate increases? - ANSWERthe fair value of a bond payable will decrease, because the bond's interest payment based on the stated / contract rate is not as appealing.