A subsidiary has a $30,000 loan obtained from its parent in a previous year. The parent charges interest on the loan at a 3% annual rate, and interest is paid on June 1 and December 1 of each year. How does this intercompany affect the parent's equity in income for the year, assuming the parent uses the complete equity method to report its investment on its own books?

Question

Quizplus · Accepted Answer

Under the complete equity method, intercompany transactions, such as interest payments from a subsidiary to its parent, are eliminated in consolidation. Therefore, the parent's equity in income is not affected by the interest payments on the loan from the subsidiary.

A Subsidiary Has a $30,000 Loan Obtained from Its Parent