CONSOLIDATED FS Flashcards
What will be the difference(s) in the consolidated statements resulting from the parent using the cost method or the equity method to account for an investment in a subsidiary to be consolidated?
There will be no difference in the final consolidated statements based on which method the parent uses to account for its investment in a subsidiary. The consolidated statements will be the same regardless of which method is used, only the consolidating process will be different.
Where will a noncontrolling interest account show in consolidated financial statements?
On Consolidated Balance Sheet as a separate item within Shareholders’ Equity.
What is the amount at which any noncontrolling interest is recognized in eliminating entry at the date of business combination?
Fair value of Noncontrolling Interest percentage claim to consolidated net assets attributable to the subsidiary. This would include its claim to the Sub’s net assets at fair value and any Goodwill recognized in the combination.
How is an “in-transit” intercompany transaction handled?
Make an adjusting entry on the consolidating worksheet to complete the transaction as though it had been received by the receiving company.
List some examples of intercompany amounts to be eliminated during a consolidation.
- Receivables/payables;2. Interest;3. Dividends;4. Bonds.
What is the effect on an Investment in Subsidiary account when the parent accounts for its investment using the equity method?
The carrying amount of the investment would change with changes in the equity accounts of the subsidiary, including:;1. Increasing with reported subsidiary profits/decreasing with reported subsidiary losses;2. Decreasing with the payment of dividends by the subsidiary;3. Decreasing for “depreciation/amortization” of the excess of fair value over book value at the date of investment.
What steps should be followed to make adjusting entries to help derive the consolidated financial statements?
- Determine if any transactions are in transit between the affiliated entities;2. Record entry on consolidating worksheet to treat in transit transactions as though they were completed.
What are the possible accounting methods a parent can use to carry on its books an investment in a subsidiary that will be consolidated?
The parent can use:; 1. Cost method; 2. Equity method; 3. Any other method it chooses.;Whatever method it uses, the investment account will be eliminated on the consolidating worksheet. (Only the cost and equity methods have been used on prior exams.)
When a parent uses the cost method to carry on its books an investment in a subsidiary that it will consolidate, what is the purpose of the reciprocity entry made on the consolidating worksheet?
The reciprocity entry adjusts the parent’s investment account for changes in the subsidiary’s retained earnings since the business combination up to the beginning of the period being consolidated that have not been recognized in the parent’s investment account because it is using the cost method of accounting.
What does the investment eliminating entry on the consolidating worksheet accomplish?
It (1) eliminates the investment account (in the subsidiary) brought on to the worksheet by the parent against the shareholders equity accounts (of the subsidiary) brought on to the worksheet by the subsidiary, (2) in the process, it adjusts the subsidiary’s identifiable assets and liabilities to fair value at the date of acquisition, and (3) recognizes Goodwill, if any.
When a parent uses the cost method to carry on its books an investment in a subsidiary that it will consolidate, what entries does the parent make on its books related to the subsidiary?
After recording the investment in the subsidiary on its books, in normal circumstances the parent will only recognize its share of the subsidiary’s dividends declared/paid as dividend income. It will NOT recognize on its books its share of the subsidiary’s reported net income/loss, nor will it adjust its investment account for the subsidiary’s income/loss or dividends.
Under U.S. GAAP, what process must be followed to determine if an entity should be consolidated?
First, it must be determined if the entity is a variable-interest entity (VIE). If it is, the reporting entity must determine if it is the primary beneficiary of the VIE and, if so, consolidate the VIE. Then, if the entity is not a VIE, the reporting entity must determine if it has controlling voting interest in the entity. If so, and nothing prevents the exercise of that control, the reporting entity (parent) must consolidate the entity (subsidiary).
Where is the consolidating process carried out?
On a consolidating worksheet; not on the books of any entity.
List the methods a parent may use to carry investment in subsidiary to be consolidated.
- Cost;2. Equity;3. Any other method it chooses.
What is the requirement and justification for the use of consolidated financial statements?
Consolidated financial statements are required when one entity has effective control of another entity. Because the entities are under common control, GAAP requires that consolidated financial statements be the primary form of financial reporting for the affiliated entities.;While in form the entities may be separate legal entities, because of the common control, in substance they are a single economic entity and their financial statements should be presented as a single economic entity.
