Package Plus, Inc. has $2,000,000 of 10% bonds outstanding on December 31, 20X8. On January 1, 20X9, WrapIt Corporation, an 80%-owned subsidiary of Package Plus, Inc. purchases a $200,000 part of Package Plus, Inc.’s outstanding bonds in the market for $195,000. The interest accrued at 12/31/X9 is $10,000. Determine the eliminating entries necessary for the 20X9 consolidated financial statements. Describe eliminating entries.
To determine the eliminating entries necessary for the 20X9 consolidated financial statements, we need to understand the concept of eliminating entries.
Eliminating entries are journal entries made in the consolidation process to remove intercompany transactions and account for the effects of transactions between a parent company and its subsidiary. These entries are necessary to consolidate the financial statements of the parent and its subsidiaries into a single set of financial statements.
In this scenario, Package Plus, Inc. owns an 80% stake in WrapIt Corporation and has outstanding bonds. WrapIt Corporation purchases a part of these bonds from Package Plus, Inc. in the market. We need to determine the eliminating entries for this transaction.
The following eliminating entries should be made:
1. Eliminate the intercompany bond purchase:
- Debit: Investment in Package Plus Bonds (Asset) - $195,000
- Credit: Investment in Package Plus Bonds (Liability) - $195,000
2. Eliminate the portion of interest expense/revenue related to the bonds:
- Debit: Interest Expense (Income Statement) - $2,000 ($10,000 x 20% ownership)
- Credit: Interest Revenue (Income Statement) - $2,000 ($10,000 x 20% ownership)
3. Eliminate the portion of interest expense/revenue related to the bonds from the subsidiary's perspective:
- Debit: Interest Expense (Income Statement) - $1,600 ($2,000 x 80% ownership)
- Credit: Interest Revenue (Income Statement) - $1,600 ($2,000 x 80% ownership)
These eliminating entries ensure that the intercompany bond transaction is eliminated from the consolidated financial statements, and the appropriate portion of interest expense and revenue is recognized in the consolidated financial statements, taking into account the ownership percentage.
Please note that the specific account names and amounts may vary depending on the company's chart of accounts and accounting policies, but the overall concept remains the same.