Question

Which of the parent company's account balances must always be eliminated and why must they be eliminated?

Answer 1

Answer:

numerous transactions among the parent and its affiliates

Explanation:

A parent company and its subsidiaries maintain their own accounting records and prepare their own financial statements. However, since a central management controls the parent and its subsidiaries and they are related to each other, the parent company usually must prepare one set of financial statements. These statements, called consolidated statements, consolidate the parent’s financial statement amounts with its subsidiaries’ and show the parent and its subsidiaries as a single enterprise.

When a company owns all the common stock of its subsidiaries, the company doesn’t really need to publish reports about its subsidiaries’ individual results for the general public to peruse. Shareholders don’t even need to know the results of these subsidiaries.

In preparing consolidated financial statements, the parent company must eliminate numerous transactions among the parent and its affiliates before presenting the consolidated financial statements to the public. For example, the parent company must eliminate transactions among the parent and its affiliates for accounts receivable and accounts payable to avoid counting revenue twice and giving the financial report reader the impression that the consolidated entity has more profits or owes more money than it actually does. Other key transactions that a parent company must eliminate when preparing consolidated financial statements are:

1. Investments in the subsidiary

2. Interest revenue and expenses

3. Advances to subsidiary

4.Dividend revenue or expenses

5.Management fees

6. Sales and purchases