When one company purchases the debt of an affiliate from an unrelated party, a gain or loss on the constructive retirement of debt is recognized by which of the following?

 When one company purchases the debt of an affiliate from an unrelated party, a gain or loss on the constructive retirement of debt is recognized by which of the following?

     Issuing Affiliate    Purchasing Affiliate    Consolidated Entity
A.    No    No    Yes
B.    Yes    Yes    No
C.    No    No    No
D.    Yes    Yes    Yes

Multiple Choice

Option A Correct

Option B


Option C


Option D

Explanation
A gain or loss on the constructive retirement of debt is recognized by the consolidated entity only, not by the issuing affiliate or the purchasing affiliate. This scenario represents an indirect intercompany debt transfer which includes an affiliate from an unrelated party. The other three answer choices include options that would indicate a direct intercompany debt transfer where an affiliate from an unrelated party is not involved. However, since an affiliate from an unrelated party is involved, the gain or loss is recognized by only the consolidated entity.

 

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