On January 1, 2016, a parent loaned $30,000 to its 100%-owned subsidiary on a 5-year, 8% note.The note requires a principal payment at the end of each year of $6,000 plus payment of interest accrued to date.The following accounts require adjustment in the consolidation process: ?
$\begin{array}{lll}&&\text { Controlling}\
\text { Assets}&\text { Debt}&\text { Retained Earnings}\\end{array}$

Question

On January 1, 2016, a parent loaned $30,000 to its 100%-owned subsidiary on a 5-year, 8% note.The note requires a principal payment at the end of each year of $6,000 plus payment of interest accrued to date.The following accounts require adjustment in the consolidation process: ?
$\begin{array}{lll}&&\text {  Controlling}\
\text {  Assets}&\text {  Debt}&\text {  Retained Earnings}\\end{array}$

Quizplus · Accepted Answer

Since the loan is between a parent and its fully owned subsidiary, it is considered an intercompany transaction. In consolidation, intercompany transactions are eliminated to prevent double-counting.

The loan receivable of $30,000 is an asset of the parent company and will be eliminated as a consolidation adjustment. Similarly, the note payable of $30,000 is a liability of the subsidiary company and will also be eliminated.

Since the loan carries an interest rate of 8%, interest expense has accrued each year. This interest expense is recognized by the subsidiary and reduces its net income. In consolidation, the interest expense is eliminated to prevent double-counting, so the subsidiary's retained earnings require adjustment.

Therefore, the correct choice is C - Yes, Yes, No.

On January 1, 2016, a Parent Loaned $30,000 to Its Controlling Assets Debt Retained Earnings\begin{array}{lll}&&\text { Controlling}\\\text { Assets}&\text { Debt}&\text { Retained Earnings}\\\end{array} Assets​ Debt​ Controlling Retained Earnings​

On January 1, 2016, a Parent Loaned $30,000 to Its $\begin{array}{lll}&&\text { Controlling}\\\text { Assets}&\text { Debt}&\text { Retained Earnings}\\\end{array}$