E 7-1 General questions 1. Which of the following is not a characteristic of a constructive retirement of bonds from an intercompany bond transaction? a Bonds are retired for consolidated statement purposes only. b The reciprocal intercompany bond investment and liability amounts are eliminated in the consolidation process. c Any gain or loss from the intercompany bond transaction is recognized on the books of the issuer. d For consolidated statement purposes, the gain or loss on the constructive retirement of bonds is the difference between the book value of the bond liability and the purchase price of the bond investment. 2. When bonds are purchased in the market by an affiliate, the book value of the intercompany bond liability is: a The par value of the bonds less unamortized issuance costs and less unamortized discount or plus unamortized premium. b The par value of the bonds less issuance costs, less unamortized discount or plus unamortized premi- ums, and less the costs incurred to purchase the bond investment. c The par value of the bonds. d The par value of the bonds less the discount or plus the premium at issuance. 3. Constructive gains and losses on bonds payable: a Arise when one company purchases the bonds of an affiliate or lends money directly to the affiliate to repurchase its own bonds b Are realized gains and losses from the viewpoint of the issuer affiliate c Are always assigned to the parent because its management makes the decisions for intercompany transactions d Are realized and recognized from the viewpoint of the consolidated entity 4. Straight-line interest amortization of bond premiums and discounts is used as an expedient in this book. However, the effective interest rate method is generally required under GAAP. When using the effective interest rate method: a The amount of the piecemeal recognition of a constructive gain or loss is the difference between the intercompany interest expense and income that is eliminated. b The piecemeal recognition of a constructive gain or loss is recorded in the separate accounts of the affiliates. c No piecemeal recognition of the constructive gain or loss is required for consolidated statement purposes. d The issuing and the purchasing affiliates do not amortize the discounts and premiums on their separate books because the bonds are retired.