Question

King, Inc. owns 70% of Simmon Co.'s outstanding common stock. King's liabilities total $450,000, and Simmon's liabilities total $200,000. Included in Simmon's financial statements is a $100,000 note payable to King. What amount of total liabilities should be reported in the consolidated financial statements?

Answer 1

Answer:

Total liabilities to be reported in Consolidated Financial statement = $550,000

Explanation:

Whenever there is a holding of more than 50% then we follow equity method under which entire liabilities and assets are combined of the holding and subsidiary, here King Inc. holds 70% of Simmon Co's outstanding stock.

Therefore All the liabilities of Simmon will be added to liabilities of King Inc. consolidated financial statements.

But in case where there is a liability or an asset to pay or receive from holding or subsidiary it is eliminated.

Note payable by Simmon to King is a liability in the books of Simmon and asset in the books of King Inc

Therefore it will be eliminated total assets of King will be shown after deducting this asset value, and total of liabilities will also be shown after deducting this value of liabilities from Consolidated financial statements.

Therefore total liabilities = $450,000 of King Inc + $200,000 liabilities of Simmon Co - $100,000 note payable inter group eliminated = $550,000.