Parent owns 100% of subsidiary. The two corporations have the following balance
ID: 2438016 • Letter: P
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?
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
Explanation / Answer
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 -
The consolidated financial statements will be as follows -
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 600,000Related Questions
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