Question

Kordel Inc. acquired 75% of the outstanding common stock of Raxston Corp. Raxston currently owes Kordel $500,000 for inventory acquired over the past few months. In preparing consolidated financial statements, what amount of Raxston’s liability should be eliminated?

Answer 1

The answer is: The total liability ($500,000)

Step-by-step explanation:

When a parent company (Kordel Inc. ) consolidates its financial statements with its subsidiaries (Raxston Corp.), it will only present one set of financial statements for the whole group. The parent company's total assets are equal to the consolidated total assets. The same applies for liabilities and equity. If Raxston owes money to Kordel, they will just cancel each other (the asset cancels out the liability).