Question: 1. What is the effect of eliminating intercompany interest income and interest expense on consolidated net income when a loss on bond retirement has been reported in a prior year's consolidated financial statements as a result of a constructive retirement of an affiliates bonds? Explain.
2. How would the relationship of interest income recorded by a subsidiary and the interest expense recorded by the parent be expected to change when comparing a direct placement of the parent's bonds with the subsidiary to a constructive retirement in which the subsidiary purchases the bonds of a parent from a nonaffiliate?
3. When an affiliates bonds are purchases from a nonaffiliate during the period, what balances will be stated incorrectly in the consolidated financial statements if the intercompany bond ownership is not eliminated in preparing the consolidated worksheet?
4. For a multicorporate entry, how is the recognition of gains or losses on bond retirement changed when emphasis is placed on the economic entity rather than the legal entity?