A clerk in the accounting department recently entered trial balance data for the parent company and...
A clerk in the accounting department recently entered trial balance data for the parent company and its subsidiaries in the company’s consolidation program. After a few minutes of additional work needed to eliminate the intercompany investment account balances, the clerk expressed his/her satisfaction with having completed the consolidation worksheet. In reviewing the printout of the consolidation worksheet, other employees raised several questions, and you have been asked to respond to them. Indicate whether each of the following questions can be answered by looking at the data in the consolidation worksheet or not, and also indicate why or why not.
- Is it possible to tell if the parent is using the equity method in recording its ownership of each subsidiary?
- Is it possible to tell if the correct amount of consolidated net income has been reported?
- One of the employees thought the parent company had paid well above the fair value of net assets for a subsidiary. Is it possible to tell by reviewing the consolidation worksheet?
- Is it possible to determine from the worksheet the percentage ownership of a subsidiary held by the parent?
Homework Answers
a. Yes. Its possible. under equity method parent records share of income from subsidiary and not identify the dividend it receives. However under cost method, it identifies the dividend received from the subsidiary.
b. No it won't be easily possible. As adjustments are made in consolidated statements to remove unrealised profits arising from certain inter-company transactions. Thus the consolidated net income reported may not be absolutely correct.
c. Yes it is. When companies paid well above the fair value of net assets for a subsidiary, the resultant excess will be recorded as Goodwill in consolidated financial statements.Moreover Non-controlling Interest will be separately recorded at the fair value.
d. Possible. the percentage can be obtained by simply dividing the sum of total investment in subsidiary made by the parent by the Summation of total non-controlling interest and total investment made.
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