Subsidiary Bond Holdings

Farflung Corporation has in excess of 60 subsidiaries worldwide. It owns 65 percent of the voting common stock of Micro Company and 80 percent of the shares of Eagle Corporation. Micro sold $400,000 par value first mortgage bonds at par value on January 2, 20X0, to Independent Company. No intercorporate ownership exists between Farflung and its subsidiaries and Independent.

On December 31, 20X4, Independent determined the need for cash for other purposes and sold the Micro bonds to Eagle for $424,000. Farflung's accounting department was not aware of Eagle's bond purchase and included the Micro Company bonds among its long-term liabilities in the consolidated balance sheet prepared at December 31, 20X4.

Required:

In reviewing the financial statements of Farflung and its subsidiaries at December 31, 20X5, you discovered Eagle Corporation's investment in Micro's bonds and immediately brought it to the attention of Farflung's financial vice president. You have been asked to present your thoughts to the financial vice president detailing the appropriate reporting treatment when intercorporate bond ownership occurs in this way and to provide recommendations as to the actions, if any, Farflung should take in preparing its consolidated statements at December 31, 20X5. Are there any ethical issues that might arise under these circumstances?