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.The adjustment of assets and liabilities needed to prepare a consolidated balance sheet is to eliminate the:

Question

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The correct adjustment for preparing a consolidated balance sheet involves eliminating intercompany transactions. Since Phil Company leased a machine to its subsidiary, Scout Company, both the asset (leased machine) recognized by the lessor (Phil Company) and the obligation under the capital lease along with the present value of the minimum lease payments recognized by the lessee (Scout Company) are intercompany transactions. These need to be eliminated to avoid double counting of assets and liabilities in the consolidated financial statements.

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