Question

King, Inc., owns 70% of Simmon Co.’s outstanding common stock. King’s liabilities total $450,000, and Simmon’s liabilities total $200,000. Included in Simmon’s financial statements is a $100,000 note payable to King. What amount of total liabilities should be reported in the consolidated financial statements?

Answer 1

$550,000

Step-by-step explanation:

Since more than 50% of Simmon's stocks are owned by King, it is considered a subsidiary. When a parent company prepares its financial statements it must reflect 100% of the total assets and liabilities of its subsidiaries (even if it doesn't own 100% of them, like this case), minus any intercompany balances. Intercompany balances can include both liabilities (notes and accounts payable) and assets (notes and accounts receivable).

In this case, king's consolidated balance will include its own liabilities + Simmon's liabilities - intercompany note payable = $450,000 + $200,000 - $100,000 = $550,000

Answer 2

$550,000

Step-by-step explanation:

In the consolidated financial statements, intercompany related transactions are deducted from the books of either of the parties involved before it is reported.

For instance, where the liabilities of one party (subsidiary/owner) is due to another (owner/subsidiary), that amount will be deducted from the sum of the liabilities of the two companies.

Total liabilities to be reported

= $450,000 + $200,000 - $100,000

= $550,000