Question

Q5. Explain the considerations to be made in the following conditions:

1. Negative retained earnings of subsidiary at acquisition
2. Subsidiary’s disposal of differential-related assets
3. Inventory-related differential
4. Fixed Assets-related differential

Answer 1

a.Rather than debiting retained earnings in the entry to eliminate the stockholders' equity balances of the subsidiary, the amount must be credited.

b.When a subsidiary disposes of an asset, it recognizes a gain or loss on the disposal equal to the difference between the proceeds received and the book value of the asset given up. If the asset is one to which a differential is assigned in the consolidation, both equity-method income recorded by the parent and consolidated net income is affected.The unamortised portion of a positive purchase differential that applies to the asset sold or written off must be treated under the equity method as a reduction of both the parent’s income from the subsidiary and the investment account. In consolidation, the unamortised part of the purchase differential must be recognized as an adjustment to the gain or loss on the disposal of the asset.

c.Any inventory-related differential is assigned to inventory for as long as the inventory units are held by the subsidiary. In the period in which the inventory units are sold, the inventory-related differential is assigned to cost of goods sold.

d. A fixed asset differential related to a fixed asset held by a subsidiary is added to the fixed asset balance in the consolidation each time a consolidated balance sheet is prepared.If the subsidiary sells the fixed asset to which the differential relates, the differential is treated in the consolidation, as an adjustment to the gain or loss on the sale of the fixed asset in the period of the sale.