At the year end Margay Co's records show a receivable from its subsidiary of $120,000. The subsidiary's records show a payable to Margay Co of $100,000. The difference is because the subsidiary sent a cheque just before the year end that Margay Co had not received. How is this treated on consolidation?

Correct answer: C) Add $20,000 cash in transit to group cash, then cancel the intra-group receivable and payable of $100,000

Explanation

Before intra-group balances are cancelled, items in transit are recorded as if they had arrived. The cash in transit of $120,000 - $100,000 = $20,000 is debited to cash and credited to the parent's receivable, which reduces it to $100,000. The matching intra-group balances of $100,000 are then cancelled, so nothing intra-group is left in the consolidated SFP.