3. Consolidations--subsequent to date of acquisition

Question 1

For internal accounting and maintaining investment in subsidiary account, what are the three types of methods? Is one preferred over another to ultimately report for the combined companies?

Answer 1

Equity Method
Subsidiary income-dividends-amortizations-deferrals+unrealized gains
[Acquiring company totals give a true representation of consolidation figures]

Initial Value Method (AKA cost method)
Investment balance remains permanent on parent’s financial records at initial fair value at acquisition date. Income=dividends.
[Easy to apply; it measures cash flows]

Partial Equity Method
Subsidiary income accrued-Dividends
[Gives balances approximating consolidation figures, but easier to apply than equity method]

B) the selection of a particular method does not affect the totals ultimately reported for combined companies.

Question 2

What does entry S do?

Answer 2

Removes Subsidiary stockholder’s equity and investment so that individual assets and liabilities can be reported

Question 3

Entry A

Answer 3

Adjusts the subsidiary balances from their book values to acquisition fair values

Question 4

Entry I

Answer 4

The one-line amount appearing in the parent’s records is not appropriate and is removed so the individual revenues and expenses can be included. The entry originally recorded by the parent is simply reversed on the worksheet to remove its impact.

Question 5

Entry D

Answer 5

Dividends are simply intra-entity transfers of cash because the parent owns them. This offsets the impact of the transaction by removing the subsidiary’s dividends paid account.

Question 6

Entry E

Answer 6

Now that income was backed out in Entry I, the appropriate expense can be recognized in E with amortizations and depreciations.