Consolidation Subsequent to Acquisition

Question 1

What does the investment eliminating entry on the consolidating worksheet accomplish?

Answer 1

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

Question 2

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?

Answer 2

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

Question 3

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?

Answer 3

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