A wholly-owned subsidiary obtained a $500,000 loan from its parent on April 1, 2019, at a 3% annual rate of interest. Interest is payable annually on March 31 of each year. The accounting year ends December 31. It is now December 31, 2021, and the loan is still outstanding. The parent uses the complete equity method to report its investment in subsidiary on its own books. How does the intercompany loan affect the parent's equity in net income calculation?

Question

Quizplus · Accepted Answer

The intercompany loan and its related interest payments are eliminated in consolidation because transactions between the parent and the wholly-owned subsidiary are intra-entity. Therefore, they do not affect the parent's equity in net income calculation.

A Wholly-Owned Subsidiary Obtained a $500,000 Loan from Its Parent