Phil Company leased a machine to its 100%-owned subsidiary, Scout Company. The direct financing lease required annual lease payments in advance of $2,319 for 5 years. The present value of the minimum lease payments at 8% interest is $10,000.
-Refer to Phil Company. The adjustment needed to arrive at consolidated net income for the first year after the lease is ____.

Question

Quizplus · Accepted Answer

Since Phil Company owns 100% of Scout Company, the lease is an intercompany transaction. The lease payments and interest income are eliminated in consolidation, so no adjustment is needed to consolidated net income.

Phil Company Leased a Machine to Its 100%-Owned Subsidiary, Scout