Parent owns 100% of subsidiary.The two corporations have the following balance sheet. AssetsParent...Parent owns...

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Accounting

Parent owns 100% of subsidiary.
The two corporations have the following balance sheet.
     Assets
Parent
Subsidiary
General assets
1,500,000
750,000
Investment in Subsidiary
200,000
Note receivable from Subsidiary
1,000,000
     Total
2,700,000
750,000
     Liabilities and Equity
General liabilities
1,500,000
150,000
Note payable to parent
1,000,000
Common Stock
300,000
200,000
Retained Earnings (deficit)
900,000
-600,000
     Total
2,700,000
750,000
Parent’s basis in Subsidiary stock is $200,000. The corporationsdo not file a consolidated tax return.
Prior to liquidation, Subsidiary uses $150,000 to pay off thegeneral liabilities.
Subsidiary transfers all of its assets to Parent in a completeliquidation.
What are the consequence to Subsidiary and Parent?

Answer & Explanation Solved by verified expert

4.5 Ratings (830 Votes)

For the Subsidiary company, the company has used $150,000 to pay off the general liabilities. So, unless any other information is provided, it can be assumed that the company used $150,000 from the assets to pay off the liabilities. So, the reduction in asset will amount to $150,000. The new asset value will be $600,000.

So, the new assets and liabilities of the Subsidiary will be -

Assets
General Assets	600,000
Total	600,000

Liabilities
Note payable to parent	1,000,000
Common Stock	200,000
Retained Earnings	(600,000)
Total	600,000

The consolidated financial statements will be as follows -

Assets
General Assets	2,100,000
Investment in Subsidiary	200,000
Note Receivable from Subsidary	1,000,000
Total	3,300,000

Liabilities
General Liabilities	1,500,000
Note Payable to Subsidiary	1,000,000
Common Stock	500,000
Retained Earnings	300,000
Total	3,300,000

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In: AccountingParent owns 100% of subsidiary.The two corporations have the following balance sheet. AssetsParent...Parent owns 100% of subsidiary.The two corporations have the following balance sheet. AssetsParentSubsidiaryGeneral assets1,500,000750,000Investment in Subsidiary200,000Note receivable from Subsidiary1,000,000 Total2,700,000750,000 Liabilities and EquityGeneral liabilities1,500,000150,000Note payable to parent1,000,000Common Stock300,000200,000Retained Earnings (deficit)900,000-600,000 Total2,700,000750,000Parent’s basis in Subsidiary stock is $200,000. The corporationsdo not file a consolidated tax return.Prior to liquidation, Subsidiary uses $150,000 to pay off thegeneral liabilities.Subsidiary transfers all of its assets to Parent in a completeliquidation.What are the consequence to Subsidiary and Parent?

Assets	Parent	Subsidiary
General assets	1,500,000	750,000
Investment in Subsidiary	200,000
Note receivable from Subsidiary	1,000,000
Total	2,700,000	750,000

Liabilities and Equity
General liabilities	1,500,000	150,000
Note payable to parent		1,000,000
Common Stock	300,000	200,000
Retained Earnings (deficit)	900,000	-600,000
Total	2,700,000	750,000