Question

1. Saguaro Inc. owns 80% of Sequoia Inc. On January 1, 2018, Sequoia sign a note and took a loan from Saguaro for the amount of $1,000,000 with an annual interest rate of 8%. No interest payment has been made. To prepare the consolidated financial statement for 2018 which of the following consolidating entry should be made?

a. debit to note payable in amount of $1,000,000

b. credit to note payable in the amount of $1,000,000

c. debit to note receivable in the amount of $1,000,000

d. credit to note receivable in the amount of $800,000

e. debit to note payable in the amount of $800,000

2. Saguaro Inc. owns 80% of Sequoia Inc. On January 1, 2018, Sequoia sign a note and took a loan from Saguaro for the amount of $1,000,000 with an annual interest rate of 8%. No interest payment has been made. To prepare the consolidated financial statement for 2018 which of the following consolidating entry should be made?

a. debit to interest receivable and credit to interest payable in amount of $80,000

b. debit to interest expense and credit to interest income in amount of $80,000

c. no consolidating entry needed in regard to interest payable and interest receivable

d. debit to interest income and credit to interest expense in amount of $80,000

e. no consolidating entry needed with regard to interest income and expense

Answer 1

Answer :-

Consolidation is the process of combining financial statements of parent company with its subsidiaries.

Subsidiary company :- Company in which another company holds majority stake say 50% and controls it's business.

Parant company :- Company which holds majority stake and controls business of another company.

In the given case,

Saguaro owns 80% stake in Sequoia Inc.

Saguaro -->parant company.

Sequoia --> Subsidiary company.

It is usual to have inter company transactions during the course of business such as stock sold,loans etc . Those intercompany transactions have to be eliminated from the books as if both saguaro and Sequoia are one and the same.

To get to know how to proceed with the process of elimination , initially we should be aware of entries made for the above said intercompany transaction.

(1)Intetcompany transaction in the given case was

Sequoia(subsidiary) took loan from saguaro(parant).

While giving loan ,entry in the books of parant company ---

notes receivable A/c. Dr $1,000,000

To Cash A/c $1,000,000

( Being loan given to Sequoia)

In the books of subsidiary company:-

Cash A/c Dr $1,000,000

To Notes playable A/c $1,000,000

(Being loan received from saguaro)

Our duty is to eliminate effect of intercompany transaction.

For this

Notes payable A/c Dr $1,000,000

To Notes receivable A/c $1,000,000

#Option A - Debit note payable for $1,000,000.

(2)

Interest amount = $1,000,000 × 8% = $80,000.

Interest related entries in the books of

Saguaro as follows.

Since , saguaro gave loan ,hence interest on it is income and vice versa.

Interest receivable A/c $80,000

To interst income A/c $80,000

In the books of Sequoia --

Interest expense A/c $80,000

To Interest Payable A/c $80,000

#d, debit interest income and credit interest expense.

We just need to revert back the actual accounting treatment.

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