Despite complexities created by the passage of time, the basic objective of all consolidations remains the same: to combine asset, liability, revenue, expense, and equity accounts of a parent and its subsidiaries. From a mechanical perspective, a worksheet and consolidation entries continue to provide structure for the production of a single set of financial statements for the combined business entity.
Subsequent to an acquisition, the parent company must report consolidated net income. Consolidated income determination involves first combining the separately recorded revenues and expenses of the parent with those of the subsidiary on a consolidated worksheet. Because of separate record-keeping systems, however, the subsidiary’s expenses typically are based on their original book values and not the acquisition-date values the parent must recognize. Consequently, adjustments are made that reflect the amortization of the excess of the parent’s consideration transferred over the subsidiary book value. Additionally, the effects of any intra-entity transactions are removed.
The time factor introduces other complications into the consolidation process as well. For internal record-keeping purposes, the parent must select and apply an accounting method to monitor the relationship between the two companies. The investment balance recorded by the parent varies over time as a result of the method chosen, as does the income subsequently recognized. These differences affect the periodic consolidation process but not the figures to be reported by the combined entity. Regardless of the amount, the parent’s investment account is eliminated (brought to a zero balance) on the worksheet so that the subsidiary’s actual assets and liabilities can be consolidated. Likewise, the income figure accrued by the parent is removed each period so that the subsidiary’s revenues and expenses can be included when creating an income statement for the combined business entity.
Why under the equity method isn’t the payment of dividends from the subsidiary to the parent included in the updating of consolidated Retained earning?
Question #2 – What are the limitations of consolidated Financial statements? Identify two and explain why you feel they are limitations
The quantitative Goodwill for impairment test begins with an estimate of the value of the reporting unit, typically a subsidiary…….if some subsidiaries are not publicly traded companies, how can one perform a test using the value of a company that is not publicly traded? Discus
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