A bond that had been issued by a subsidiary at a premium was acquired several years ago by its parent on the market at a discount. The bond issue is still outstanding. Which of the following statements is true?

Multiple Choice

• The bond issue has no impact on the preparation of current consolidated financial statements because the bond acquisition was made in the past.

• The original gain would be reported in the current years consolidated income statement.

• The interest income and interest expense balances exactly offset so that no adjustment to retained earnings or income is necessary.

• For consolidated purposes, retained earnings must be increased at the beginning of the current year, but by an amount that is smaller than the original gain.