Question

On December 31, 2005, Grey, Inc. owned 90% of Winn Corp., a consolidated subsidiary, and 20% of Carr Corp., an investee in which Grey cannot exercise significant influence. On the same date, Grey had receivables of $300,000 from Winn and $200,000 from Carr. In its December 31, 2005, consolidated balance sheet, Grey should report accounts receivable from affiliates of:______a) $500,000b) $340,000c) $230,000d) $200,000

Answer 1

Grey, Inc. should eliminate the receivables from the consolidated subsidiary Winn Corp. in the consolidated balance sheet but include the receivables from Carr Corp., resulting in accounts receivable from affiliates amounting to $200,000.

Step-by-step explanation:

When preparing consolidated financial statements, a parent company must eliminate any intercompany transactions and balances with its consolidated subsidiaries. Since Grey, Inc. owns 90% of Winn Corp., which is considered a consolidated subsidiary, any receivables from Winn should be eliminated in the consolidated balance sheet. However, the 20% ownership of Carr Corp. indicates an investment without significant influence, thus financial reporting for this stake is treated differently, typically using the cost or equity method, and should not be eliminated. Therefore, Grey should report the $200,000 from Carr as accounts receivable in its consolidated balance sheet.

Consequently, the correct amount of accounts receivable from affiliates that Grey should report is $200,000.

Answer 2

d) 200,000

Step-by-step explanation:

Grey Inc. owned 90% of Winn Corp, which is classified as subsidiary and is accounted for by consolidating the financial statements of the subsidiary.

Grey Inc. owned 20% of Carr Corp. and does not have significant influence so indicating that the investment is supposed to be classified at fair value.

Consolidation Method of accounting involves adding all assets and liabilities of the subsidiary in the financial statements of Parent Company. However, inter company balances (receivable / payable) are eliminated and thus are not included in consolidated financial statements to avoid double counting, thus the balance receivable from Winn Corp, is not included in the consolidated balance sheet of Grey Inc.

Change in fair value of Carr Corp is taken either in profit / loss or directly taken to statement of changes in equity depending on the policy of Grey Inc. However any receivable / payable between shareholder and the invested company appears as it is in the balance sheet, therefore the balance of $200,000 receivable from Carr Corp shall appear as receivable in consolidated balance sheet of Grey Inc.