Consolidated Financial Statements

Question 1

How does the Consolidating Process Work?

Answer 1

The consolidating process is done on a Consolidating Worksheet.

1st - record the account balances of each entity on the worksheet

2nd - record adjusting entries

3rd - record eliminating entries

4th - complete Consolidating Worksheet

5th - prepare formal Consolidated Financial Statements from the worksheet.

Question 2

What will affect the adjusting entries and eliminating entires involved in the consolidating process?

Answer 2

Whether the consolidating process is being carried out at the date of the business combination or at a subsequent date

Whether the parent owns 100% (all) of the voting stock of a sub or less than 100% of the voting stock

Whether the parent carries its investment in a sub on its books using the cost or equity method of accounting

Whether transactions between the affiliated entities (parent and its subs) originate with the parent or with a sub

Question 3

What is the Consolidation Concept?

Answer 3

EAGLIN

eliminated the sub’s Equity accounts

Assets will be adjusted for the differences between the CV and FV on the acquisition date

Insert Goodwill

Liabilities will be adjusted for the differences between the CV and FV on the acquisition date
Investment is sub account will be eliminated

the Noncontrolling interest will be recorded in equity based on the FV on the date of acquisition adjusted for changes due to income or distribution since that date.

Question 4

Business Combination

Answer 4

Parent and subsidiary

At date of acquisition:
A consolidated balance sheet will combine both the parent and sub’s assets, liabilities, and shareholder claims (majority and noncontrolling, if any)

There would be no changes/adjustments to the consolidated income statement, statement of retained earnings, or statement of cash flow that’s because there will not yet have been any activity including the sub.

After the date of acquisition:
the parent company will account for its investment in the sub using either the equity method or the cost method

Question 5

What is the Equity Method?

Answer 5

The parent company will adjust the Carrying Value (CV) of its investment of the sub over time

The parent’s share of sub’s income or loss:
Investment in sub (B/S) XX
Equity in earnings (I/S) XX

The parents share of dividends declared by the sub:
Dividends receivable/cash (B/S) XX
Investment in sub (B/S) XX

The amortization (ie, depreciation) of any difference between the fair value (FV) of identifiable assets and the CV of those assets. Assuming that FV is greater than CV:
Equity in earnings (I/S) XXX
Investment in sub (B/S) XXX

Question 6

What is the Cost Method?

Answer 6

The parent company WILL NOT adjust on its books the CV of its investment in the sub to reflect the following:
The parent’s share of the sub’s income or loss

The parent’s share of dividends declared by the sub

The amortization (ie, depreciation) of any difference between the FV of identifiable assets and the CV of those assets

BUT, parent will recognize its share of dividends declared by the sub as dividend income:
Dividends receivable/cash (B/S) XXX
Dividend income (I/S) XXX

Question 7

Investment in Sub Eliminated

Answer 7

Common stock (C/S) of sub XXX
Additional paid-in capital (APIC) of sub XXX
Retained earnings (RE) of sub XXX
Identifiable assets of sub (FV at acquisition) XXX
Goodwill (if purchase price > FV of net assets at acquisition) XXX
Identifiable liabilities of sub (FV at acquisition) XXX
Investment in sub XXX