Question

Parent owns 100% of subsidiary.

The two corporations have the following balance sheet.

Assets	Parent	Subsidiary
General assets	1,500,000	750,000
Investment in Subsidiary	200,000
Note receivable from Subsidiary	1,000,000
Total	2,700,000	750,000
Liabilities and Equity
General liabilities	1,500,000	150,000
Note payable to parent		1,000,000
Common Stock	300,000	200,000
Retained Earnings (deficit)	900,000	-600,000
Total	2,700,000	750,000

Parent’s basis in Subsidiary stock is $200,000. The corporations do not file a consolidated tax return.

Prior to liquidation, Subsidiary uses $150,000 to pay off the general liabilities.

Subsidiary transfers all of its assets to Parent in a complete liquidation.

What are the consequence to Subsidiary and Parent?

Answer 1

For the Subsidiary company, the company has used $150,000 to pay off the general liabilities. So, unless any other information is provided, it can be assumed that the company used $150,000 from the assets to pay off the liabilities. So, the reduction in asset will amount to $150,000. The new asset value will be $600,000.

So, the new assets and liabilities of the Subsidiary will be -

Assets
General Assets	600,000
Total	600,000
Liabilities
Note payable to parent	1,000,000
Common Stock	200,000
Retained Earnings	(600,000)
Total	600,000

The consolidated financial statements will be as follows -

Assets
General Assets	2,100,000
Investment in Subsidiary	200,000
Note Receivable from Subsidary	1,000,000
Total	3,300,000
Liabilities
General Liabilities	1,500,000
Note Payable to Subsidiary	1,000,000
Common Stock	500,000
Retained Earnings	300,000
Total	3,300,000