According to the text Advanced Accounting, bonds are debt that are
             issued for a period of more than one year. Although the US government,
             local governments, water districts, companies and many other types of
             institutions sell bonds, there also a potential value for a for a parent
             company to extend bonds, or to extend credit, to subsidiary companies of
             the parent. A parent company that purchases its subsidiary's bonds would
             eliminate investment on paper in terms of its bonds and bonds payable, its
             interest receivable and interest payable and interest revenue and interest
             expense and transfer these assets to the subsidiary company. The small
             subsidiary would pay less potential tax, yet the overall organization would
             accrue more given the lesser tax paid by the larger parent organization in
             comparison to the subsidiary, and also the parent's ability to gain greater
             control over the organization of the subsidiary company.
             According to "Affiliated Corporation," for the parental company, the
             profit on the collections on the note from the point of view of the
             subsidiary company would be viewed a gain from the sale of a capital asset,
             the same as in the hands of the parent. For instance, if the parent had
             elected to report its gains from its assets on an installment basis, the
             subsidiary would be also required to continue reporting its gain on the
             Although inter-company bond transactions can occur through direct and
             indirect means, for a parent company is to lend money directly to a
             subsidiary company, the subsidiary must continue to report its gain on the
             same basis, although this gain may be less of a share of its profits than
             in the case of the parent company. (Unclefed.com, 2004) Thus, indirect
             means of inter-company lending may be preferred, if it is in the company's
             interest to alter the method of allocation.
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