Introduction to Consolidated Financial Statements

Question 1

Identify the general kinds of eliminating entries made in the consolidating process.

Answer 1

1. )Investment eliminating entry. (Always);
2. )Intercompany Receivables/Payables elimination(s);
3. )Intercompany Revenues/Expenses elimination(s);
4. )Intercompany Profit elimination(s).

Question 2

What are the kinds of information needed to prepare consolidated financial statements?

Answer 2

1. )Financial statements/Adjusted trial balances of affiliated entities;
2. )Data as of date of acquisition, including:
   a. )Book values of subsidiary’s assets and liabilities;
   b. )Fair values of subsidiary’s assets and liabilities;
   c. )Fair value of noncontrolling interest, if any;
   d. )Fair value of precombination equity interest, if any.
3. )Intercompany transaction data and balances

Question 3

What is the basic sequence of steps in the consolidating process?

Answer 3

1. )Record trial balances on consolidating worksheet;
2. )Record adjusting entries, if any;
3. )Record eliminating entries;
4. )Complete consolidating worksheet;
5. )Prepare consolidated financial statements.

Question 4

What are the alternative circumstances that affect adjustments and eliminations made in the consolidating process? (Disregard pooling of interests consideration.)

Answer 4

1. )Whether the parent carries its investment using the cost or equity method;
2. )Whether the consolidation is carried out at the date of the business combination or at a subsequent date;
3. )Whether the parent owns 100% (all) of the voting stock of a subsidiary or less than 100% of the stock;
4. )Whether transactions between the affiliated companies originate with the parent or subsidiary

Question 5

Under U.S. GAAP, what process must be followed to determine if an entity should be consolidated?

Answer 5

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)

Question 6

What is the requirement and justification for the use of consolidated financial statements?

Answer 6

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

Question 7

How does a parent company record a subsidiary?

Answer 7

As an “Investment”

Question 8

Where is the consolidating process carried out?

Answer 8

On a consolidating worksheet; not on the books of any entity.

Question 9

What ownership percentage range is normally assumed to convey significant influence over an investee?

Answer 9

20%-50%

Question 10

Will the choice of methods a parent uses on its books to account for an investment in subsidiary affect the consolidating process and Financials?

Answer 10

Will only affect the Consolidating Process. Consolidated Financials will remain unchanged

Question 11

What information that exists at the date of an acquisition will be needed to carry out the consolidating process?

Answer 11

1. ) FV of subs assets and liabilities
2. ) BV of subs assets and liabilities
3. ) Parent’s cost of its investment in the subsidiary

Question 12

Can a Separate Parent and Subsidiary Statement be issued as the primary form of public financial statement disclosure under GAAP for a parent and its subs?

Answer 12

No, only a consolidated statement

Question 13

What eliminating entry is always required in a consolidation?

Answer 13

Investment eliminating entry

Question 14

What are the exceptions to the consolidating rules? Parent has majority ownership of sub)

Answer 14

1. ) Foreign sub largely controlled by the foreign gov through prohibition on paying dividends, control of day to day ops or other impediments to control
2. ) Domestic sub is in bankruptcy
3. ) Parent is prevented from exercising control