Question

Pink Ltd is the parent of Floyd Ltd. On 1 January 20X3 Pink made a loan to Floyd in the form of bills of exchange in the total amount of $80,000 face value. Floyd was required to repay the $80,000 amount (which included the interest component) on 1 October 20X3. On 1 February Pink discounted $20,000 of the bills with the Darkside bank, without recourse, and received $15 000, cash. Floyd was unaware of the discounting. The end of financial reporting year for the group is 30 June.

Which is the correct set of consolidation entries for June 30 20X3 in respect of the bills of exchange?

Select one:

A.

Accounts	Debit $	Credit $
(Adjustments column)
Bills payable—to Pink	20,000
Bills payable—to others		20,000

(Eliminations column)	Debit $	Credit $
Bills payable—to Pink	60,000
Bills receivable—to others		60,000

Contingent liabilities 20,000
(Not double entry)

.B.

Accounts	Debit $	Credit $
(Adjustments column)
Bills payable—to Pink	15,000
Bills payable—to others		15,000

(Eliminations column)	Debit $	Credit $
Bills payable	65,000
Bills receivable		65,000

Answer 1

Since , in the standalone balancesheet of Pink Ltd., the bills receivable drom Floyd for an amount of $20,000 has been discounted with bank, so now Floyd Ltd is required to to pay the $20,000 out of the total $80,000 to the bank and the remaining $60,000 is still payable to Pink Ltd.

Thus adjustment in the books of Floyd would be:

Bills payable—to Pink	20,000
Bills payable—to others		20,000

This would reduce the amount payable to Pink and record the amount now payable to Bank.

The elemination emtry would be:

Bills payable—to Pink	60,000
Bills receivable—to others		60,000

This is because the amount receivable by Pink from Floyd has been reduced to $60,000 and thus elemination entry would be for $60,000.

Thus the answer would be A

For any clarification, please comment. Kindly Up Vote