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Beams9eSM_ch11 - Chapter 11 19 Chapter 11 CONSOLIDATION...

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Chapter 11 19 Chapter 11 CONSOLIDATION THEORIES, PUSH-DOWN ACCOUNTING, AND CORPORATE JOINT VENTURES Answers to Questions 1 Parent company theory views consolidated financial statements from the viewpoint of the parent company and entity theory views consolidated financial statements from the viewpoint of the business entity under which all resources are controlled by a single management team. By contrast, contemporary theory sometimes reflects the parent company viewpoint and at other times it reflects the viewpoint of the business entity. A detailed comparison of these theories is presented in Exhibit 11–1 of the text. 2 Only contemporary theory is changed by current pronouncements of the Financial Accounting Standards Board. While such pronouncements can and do change the current accounting and reporting practices, they do not change the logic or the consistency of either parent company or entity theory. 3 The valuation of subsidiary assets on the basis of the price paid for the majority interest seems justified conceptually when substantially all of the subsidiary stock is acquired by the parent. But the conceptual support for this approach disappears when only a slim majority of subsidiary stock is acquired. In addition, the valuation of the noncontrolling interest based on the price paid by the parent company has practical limitations because noncontrolling interest does not represent equity ownership in the usual sense. The ability of noncontrolling stockholders to participate in management is limited and noncontrolling shares do not possess the usual marketability of equity securities. 4 Consolidated assets are equal to their fair values under entity theory only when the book values of parent company assets are equal to their fair values. Otherwise, consolidated assets are not equal to their fair values under either parent company or entity theories. 5 The valuation of the noncontrolling interest at book value might overstate the equity of noncontrolling shareholders because of the limited marketability of shares held by noncontrolling stockholders and because of the limited ability of noncontrolling stockholders to share in management through their voting rights. Valuation of the noncontrolling interest at book value also overstates or understates the noncontrolling interest unless the subsidiary assets are recorded at their fair values. 6 Consolidated net income under parent company theory and income to the majority stockholders under entity theory should be the same. This is illustrated in Exhibit 11–5, which shows different income statement amounts for cost of sales, operating expenses, and income allocated to noncontrolling stockholders, but the same income to majority stockholders. Note that consolidated net income under parent company and contemporary theories reflects income to majority stockholders.
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