Unite Ltd provided a loan of $1 000 000 to its subsidiary Inspire Ltd. Interest of $100 000 was charged during the year ended 30 June 2018. On consolidation, which of the following adjustments is needed at 30 June 2018 in relation to the interest charged?
A) No adjustment needed
B) Dr Interest revenue $100 000 Cr Interest expense $100 000
C) Dr Interest expense $100 000 Cr Interest revenue $100 000
D) Dr Retained earnings $100 000 Cr Cash $100 000

Question

Quizplus · Accepted Answer

When Unite Ltd provides a loan to its subsidiary, it earns interest revenue, while Inspire Ltd incurs interest expense. These two accounts should be eliminated upon consolidation. Therefore, an adjustment is needed to eliminate the effect of interest revenue and interest expense in the consolidated financial statements. 
In this case, Unite Ltd earned interest revenue of $100 000, which will be eliminated by a debit to interest revenue and a credit to interest expense. Therefore, the correct entry is:
Dr Interest revenue $100 000
Cr Interest expense $100 000

Unite Ltd Provided a Loan of $1 000 000 to Its