Question

A parent loans $100,000 to its subsidiary during 2014, at an annual interest rate of 4%. The subsidiary has not paid the interest at year-end. On the consolidation working paper, eliminating entries include all BUT which one of the following?

1) Interest income of $4,000 on the loan
2) Interest expense of $4,000 on the loan
3) An increase in the loan payable of $4,000
4) An increase in the investment in subsidiary of $4,000

Answer 1

Eliminating entries on the consolidation working paper would include interest income and expense, and an increase in the loan payable, while the investment in subsidiary would not be included. Correct option is 4)

Step-by-step explanation:

The correct answer is 4) An increase in the investment in subsidiary of $4,000.

Eliminating entries are made on the consolidation working paper to remove intercompany transactions between a parent and its subsidiary. In this case, the parent loaned $100,000 to its subsidiary and charged an annual interest rate of 4%. The subsidiary has not paid the interest at year-end.

The eliminating entries would include:

1. Eliminate Interest income of $4,000 on the loan because it represents income earned by the parent but not yet received.
2. Eliminate Interest expense of $4,000 on the loan because it represents an expense incurred by the subsidiary but not yet paid.
3. ***An increase in the loan payable of $4,000, which represents the unpaid interest amount that the subsidiary owes to the parent.

So, option 4) An increase in the investment in subsidiary of $4,000 is not included in the eliminating entries as it does not relate to the loan transaction.