Question

Intercompany Financing Transactions

Sessions Athletic Gear borrowed $5,000,000 from its parent, PF Consolidated Inc., at an interest rate of 5%. The loan was made on September 30, 2019, with interest due semiannually on March 31 and September 30 of each year, and principal due in 2023. PF’s accounting year ends on December 31. You are doing the consolidation working paper at December 31, 2020. The loan is still outstanding, and Sessions has made interest payments as required.

a. What balances appear in the December 31, 2020, trial balances of PF and Sessions with respect to this intercompany loan? What balances should appear on the consolidated financial statements?

Remember to use negative signs with your credit balance answers in the Dr (Cr) columns (not in the Credit column).

Enter numerical answers using all zeros (do not abbreviate answers to millions or thousands).

	PF Consolidated Inc. Dr (Cr)	Sessions Athletic Gear Dr (Cr)	Debit	Credit	Consolidated Balances Dr (Cr)
Loan receivable	Answer	Answer	Answer	Answer	Answer
Interest receivable	Answer	Answer	Answer	Answer	Answer
Interest payable	Answer	Answer	Answer	Answer	Answer
Loan payable	Answer	Answer	Answer	Answer	Answer
Interest revenue	Answer	Answer	Answer	Answer	Answer
Interest expense	Answer	Answer	Answer	Answer	Answer

b. Prepare the working paper eliminating entries needed for this intercompany loan at December 31, 2020.

Enter numerical answers using all zeros (do not abbreviate answers to millions or thousands).

General Journal
Description	Debit	Credit
AnswerLoan payableLoan receivableInterest payableInterest receivableInterest revenueInterest expense	Answer	Answer
AnswerLoan payableLoan receivableInterest payableInterest receivableInterest revenueInterest expense	Answer	Answer
To eliminate intercompany payable/receivable.
AnswerLoan payableLoan receivableInterest payableInterest receivableInterest revenueInterest expense	Answer	Answer
AnswerLoan payableLoan receivableInterest payableInterest receivableInterest revenueInterest expense	Answer	Answer
To eliminate intercompany loan principal.
AnswerLoan payableLoan receivableInterest payableInterest receivableInterest revenueInterest expense	Answer	Answer
AnswerLoan payableLoan receivableInterest payableInterest receivableInterest revenueInterest expense	Answer	Answer
To eliminate intercompany interest revenue/expense.

Answer 1

ANSWER:

The loan was made on September 30, 2019, with interest due semiannually on March 31 and September 30 of each year, and principal due in 2023. PF’s accounting year ends on December 31. You are doing the consolidation working paper at December 31, 2020.

Accrued interest at December 31, 2017, is $5,000,000 x 5% x 3/12 = $62,500

Interest revenue/expense for 2017 = $5,000,000 x 5% = $250,000.

No balances should appear on the consolidated financial statements.

Eliminating entries, in journal entry form, are:

Loan payable ..........5,000,000

Loan receivable ................5,000,000

Interest payable...........62,500

Interest receivable..............62,500

Interest revenue.........250,000

Interest expense..................250,000