Consolidated Financial Statements Flashcards
- Who prepares the consolidated financial statements?
-Parent only
Consolidated statements are prepared only by a parent company, not separately by both a parent and a subsidiary
- Under GAAP, which of the following can be issued as the primary form of public financial statement disclosure for a parent and its subsidiaries?
- Parent only Statement
- Separate Parent and Subsidiary Statements
- Consolidated Statements
-Consolidated statements
Under GAAP, separate parent and subsidiary statements may not be issued as the primary form of public disclosure for a parent and its subsidiaries. Under GAAP, only consolidated financial statements may be issued as the primary form of public disclosure for a parent and its subsidiaries.
- The results of the consolidating process are recorded in the books of the:
- Parent
- Subsidiary
Answer: Neither.
The results of the consolidating process (adjustments, eliminations, etc.) are not recorded on either the books of the parent or of any subsidiary. The consolidating process takes place on worksheets and schedules, and the results are presented in the form of consolidated financial statements. Some of the worksheet and schedule data is carried forward from period end to period end to facilitate the recurring consolidating process
- Which one of the following kinds of eliminations, if any, will be required in every consolidating process?
- Intercompany Receivables/Payables
- Intercompany Investment
- Intercompany Revenues/Expenses
Answer: Intercompany investment
While an intercompany investment elimination will be required in every consolidating process (to eliminate the parent’s investment against the subsidiary’s shareholders’ equity), intercompany receivables/payables and intercompany revenues/expenses eliminations will not be required in every consolidating process. Those kinds of eliminations will be required only if the affiliated companies have engaged in intercompany transactions that resulted in such balances.
- Which one of the following would be of concern in preparing consolidated financial statements at the end of the operating period following a business combination that would not be a concern in preparing financial statements immediately following a combination?
- Whether or not there are intercompany accounts receivable/accounts payable.
- Whether or not goodwill resulted from the business combination.
- Whether the parent carries its investment in the subsidiary using the cost method or the equity method.
- Whether or not there is a noncontrolling interest in the subsidiary.
Answer: Whether the parent carries its investment in the subsidiary using the cost method or the equity method.
The other 3 answers would be of concern both at the end of the operating period & immediately following a combination.
Whether the parent carries its investment in the subsidiary using the cost method or the equity method would be of concerning in preparing consolidated financial statements at the end of the operating period following a business combination but would not be of concern in preparing financial statements immediately following the combination. When consolidated financial statements are prepared immediately following a combination, there has been no period over which the parent has “carried” the investment on its books. Therefore, the method it WILL (going forward) use is not of concern immediately after the combination.
- Which of the following financial statements, if any, prepared by a parent immediately after a business combination is likely to be different from financial statements it prepares immediately before the business combination?
- Balance Sheet?
- Income Statement?
- Balance Sheet - YES
- Income Statement - NO
note: While a parent’s balance sheet prepared immediately after a business combination will be different from its balance sheet prepared immediately before the business combination, the parent’s income statement is not likely to be different from the consolidated income statement prepared immediately after the combination. As a result of the combination, the parent will have on its balance sheet an investment account (and probably other accounts/amounts) that it did not have before the combination, but the consolidated income statement prepared immediately after a business combination will likely be the same as the parent’s pre-combination income statement.
- On January 1, 20X1, Prim, Inc. acquired all the outstanding common shares of Scarp, Inc. for cash equal to the book value of the stock. The carrying amount of Scarp’s assets and liabilities approximated their fair values, except that the carrying amount of its building was more than fair value. In preparing Prim’s 20X1 consolidated income statement, which of the following adjustments would be made?
- Depreciation expense would be decreased, and goodwill would be recognized.
- Depreciation expense would be increased, and goodwill would be recognized.
- Depreciation expense would be decreased, and no goodwill would be recognized.
- Depreciation expense would be increased, and no goodwill would be recognized.
Answer: Depreciation expense would be decreased, and goodwill would be recognized.
note: read the question carefully! even though the answer seems counter intuitive, it is correct. note that they acquire all of the o/s shares of scarp for their “approximate” FV’s…so right there you think “no goodwill”…however if you continue reading the question states “except that BV of building was more than FV….so now you actually paid more than the BV….this difference is assigned to goodwill. so depreciation expense decreases because building will be written down and goodwill w/b recognized.
- If a parent uses the equity method on its books to carry its investment in a subsidiary, which one of the following current year entries (made by the parent) must be reversed on the consolidating worksheet?
Income from Subsidiary - Y/N?
Dividends from Subsidiary - Y/N?
Income & Div current year entries (made by the parent) must both be reversed on consolidating worksheet
Note: When a parent uses the equity method to account for its investment in a subsidiary, the parent will recognize on its books during the year its share of the subsidiary’s income (or loss) and its share of dividends declared by the subsidiary. Therefore, in the consolidating process, both the income recognized from the subsidiary and the dividends recognized from the subsidiary (and any other equity-based entries made by the parent) must be reversed so that the elements that make up those entries (revenues, expenses, etc.) can be individually recognized on the consolidating worksheet and the consolidated financial statements.
- Assume that in acquiring a subsidiary, the parent determined that several depreciable assets had a fair value greater than book value. If the parent accounts for its investment in the subsidiary using the equity method, what effect will the amortization of the excess fair value over the book value of the subsidiary’s assets have on the following parent’s accounts?
- Investment in Subsidiary - Increase/Decrease?
- Equity Revenue from Subsidiary - Increase/Decrease?
-Both accounts (investment in sub & equity revenue from sub) would decrease.
Why?
When the fair value of a subsidiary’s assets is greater than book value, it is as though the parent paid more for the assets than the subsidiary paid for those assets. Using the equity method of accounting for the investment, the parent must depreciate the excess of fair value over book value. That equity entry would be: DR: Equity Revenue - to reduce it by the amount of depreciation on the excess of fair value over book value, and CR: Investment in Subsidiary - to offset a portion of the net income (or increase the amount of net loss) recognized from the subsidiary. Thus, while Equity Revenue would be decreased, so also would be Investment in Subsidiary, not increased as in this incorrect answer.
