Treatment for Exp. capitalized in sister concern but expensed out in parent co.

[keviv]

Hi to all,

Would like to know the further accounting treatment for if,

- Parent co. provides floats to subsidiary concern for all exp.
- Subsidiary concern has previously (in previous years) capitalized the amount & shows due to parent co.
- Parent co. has expensed out the floats & not capitalized or shows due from subsidiary concern.

Would appreciate your response.

 

[bklynboy]

Couple of questions. What is the "float" being capitalized? Why is there an expense on parents books if the subsidiary is the one capitalizing - would expect parent to have debit due from sub and credit cash? Why does parent not have an offsetting due from subsidiary - how can you do eliminations at the consolidated level?

 

[keviv]

- Float is like money sent to subsidiary concern to run their exp.
- This money sending process for running subsidiary concern costs for exploration was not known so taken as exp. in Parent co. but is capitalized in Subsidiary co.
- Since these are of previous years cash cannot be touched.
- Also since Parent co. has written off the exp. offsetting due from subsidiary would not be possible.

 

[bklynboy]

Ok - so float is money paid to subsidiary to cover their costs.

This is a capital contribution or a loan depending on whether its repaid or not. The accounting you are doing seems strange. From what I can tell here is what I think should happen.

Subsidiary - Debit Cash and Credit Loan payable to Parent. There is nothing to capitalize by subsidiary here.

Parent - its debit receivable from sub and credit cash.

I am lost why you say this is prior years cash and it cant be touched and that parent has written off the amount due (you should have recorded it as capital if sub was not repaying - its never a write-off if its an affiliiated loan).

This is all very confusing but I stand by what I have shown above as the proper accounting barring me completely misunderstanding what is happening here.

 

[Counterofbeans]

bklynboy is right.

Here's your problem:

- Parent co. has expensed out the floats & not capitalized or shows due from subsidiary concern.

VS.

- Subsidiary concern has previously (in previous years) capitalized the amount & shows due to parent co.

Your I/C eliminations don't work & they cannot ever work with that treatment.

The subsidiary needs to write off the payable if the parent expensed the receivable & they would need to go to the same line item in the financial statements, as the consolidated financial statements shouldn't show any I/C expense/gain. I'm still confused why the parent expensed the I/C receivable though. Why would they do that? The better treatment would likely be to have the parents record the I/C receivable again.

If the parent, for whatever reason, insists on expensing that receivable, I'd be VERY careful, as that smells like such could have potential tax ramifications that are not friendly.