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Chapter 3 Illustration-C - Chapter 3 The Reporting Entity...

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Chapter 3The Reporting Entity and Consolidation of Less-than-Wholly-OwnedSubsidiaries with No DifferentialsSummary1.When a company owns less than one hundred percent of the voting common stock of anothercompany, the company will be required to prepare consolidated financial statements if it hascontrol of the other company.If the company has more than 50% of the voting common stockof the other company it is presumed that it has has control and must prepare consolidatedfinancial statements.The controlling company is called the “parent company” and thecontrolled company is called the “subsidiary”. Occasionally, ownership of less than 50% of thevoting common stock can confer control.In this situation, an argument can be made that thecompany with control should prepareconsolidated financial statements, although such reportingis not currently required.2.Noncontrolling interest (NCI) occurs when less than 100 percent equity is acquired in asubsidiary. It represents the fact that the parent may control but not own the entire subsidiary.The noncontrolling shareholders have a claim on the subsidiary's assets and earnings throughtheir percentage ownership of the stock.3.Noncontrolling interest clearly does not meet the definition of a liability. ASC 810 makes clearthat the noncontrolling interest's claim on net assets is an element of equity, not a liability. Itrequires reporting the noncontrolling interest in equity. The non-controlling interest shouldappear as a part of stockholders' equity where it would be clearly identified, labeled anddistinguished from the parent’s controlling interest in subsidiaries. It may no longer be shownbetween liabilities and stockholders' equity or classified as neither.4.When a company acquires control of a subsidiary during a fiscal year, pre-acquisition income isthe income attributed to the previous owners of the shares of the common stock for the portionof the year before the acquisition. Only post-acquisition revenues and expenses are included inconsolidated totals.The non-controlling interest is thereby viewed as beginning as of theacquisition date.5.A parent company should account for the sale of a portion of an investment in a subsidiary asfollows:If control is maintained after the sale, then the difference between the sales proceedsand the book value is an adjustment to the parent’s owners’ equity (APIC).If control is notmaintained, then such difference is a gain or loss on sale of investment.In either situation, thebook value of the investment should be on the equity method basis in order to calculate theproper entry for the sale.Therefore, if the investment has been kept under cost/ the initialvalue, the investor adjusts the book value of its investment in order to bring an initial value/costmethod investment basis to an equity method basis.

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Term
Spring
Professor
Goo
Tags
Balance Sheet, NCI, Generally Accepted Accounting Principles

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