| Chapter: | Reading | Topic |
Strut Co. has a payable to its parent, Plane Co. In which of the following balance sheets should this payable be reported separately?
| Strut's balance sheet | Plane's consolidated balance sheet |
|
|---|---|---|
When one company (the parent) owns more than 50% of another company (the subsidiary), the companies are related and their financial statements must be combined. This process is known as consolidation.
As part of the consolidation process, transactions between related companies, known as intercompany transactions, are eliminated. Such transactions have the potential to distort the overall financial statement results. For example, sales between the related companies could artificially increase inventory values, revenues, and net income if they were not removed from the financial statements.
A payable between a subsidiary and a parent will be reported on the parent and subsidiary companies' individual balance sheets. However, it will be eliminated as part of the consolidation process and therefore not reported on the parent's consolidated balance sheet.
Things to remember:
Transactions between related parties, known as intercompany transactions, are eliminated during the consolidation process. Therefore, items such as payables and receivables between related parties do not appear on the consolidated balance sheet.
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