On January 1, 20X8, Piano Company acquired all of Song Corporation's voting shares for $280,000 cash. On December 31, 20X9, Song owed Piano $5,000 for services provided during the year.

When consolidated financial statements are prepared for 20X9, which entry is needed to eliminate intercompany receivables and payables in the consolidation worksheet?

A) Accounts Payable 5,000

Accounts Receivable 5,000

B) Accounts Receivable 5,000

Accounts Payable 5,000

C) Retained Earnings 5,000

A) Accounts Payable 5,000

Accounts Receivable 5,000

Explanation:

Song owed for services to Piano it means there is an account receivable for Piano and Account payable for Song for $5,000. In consolation of financial statement are inter company transactions are eliminated from the financial statements. Any receivable and Payable associated with related parties like subsidiary and parent company are adjusted. A journal entry is passed to eliminate the effect of these outstanding balance from the financial statements. As receivables have debit balance it is credited to eliminate the balance and payable has credit balance it is debited to eliminate the balance.

B) Dr Accounts Receivable 5,000

Cr Accounts Payable 5,000

Explanation:

Since Song Corporation is part of Piano Company, a company cannot owe itself. It is like your right hand owing money to your left hand. You must eliminate that debt in the consolidated balance sheet by increasing your current assets (accounts receivable) and at the same time increase your current liabilities (accounts payable) by the same amount. that way the accounting equation will be balanced and the company will be able to report the debt and the collection without altering the income statement.