Question

What is the main purpose of the elimination entries for intercompany depreciable asset purchases? What is the purpose of the elimination entries for intercompany Bonds Payable? What is the main difference between the two type of elimination entries on the consolidated statements.?

Answer 1

1. When an asset is purchased between parent and subsidiary, the selling company may recognise gains/losses and there will be movement of cash and asset. However when we consolidate the statements, the asset still appears in the groug and it's legally incorrect to report any gains/losses by mere transfer. Thus to remove the affects of the transfer we need to post elimination entries.

2. When two or more companies' financial statements are consolidated, any debt lent to or borrowed by the mutual companies will be mere transfer of cash within the consolidated companies as a whole. Thus the elements of debt will be gone. Hence we remove the effects of mutual debts in form of bonds by posting elimination entries.

3. There are three, and not two types of elimination entries.

• The first type of entry is to eliminate the ownership of stocks held by mutual companies. This will be done by crediting the following share of equities of one company to the investment asset held by the other.
• The second type involves cancellation of debts owed mutually by the two or more companies.
• The third type of entries pertain to elimination of entries of transactions pertaining to revenue and expenses incurred and accrued between companies. This will depict the correct picture of income and expenditure of the overall consolidated group.