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Unformatted text preview: CHAPTER 5 CONSOLIDATION FOLLOWING ACQUISITION ANSWERS TO QUESTIONS Q5-1 Additional entries are needed to eliminate all income statement and retained earnings statement effects of intercorporate ownership and any transfers of goods and services between related companies. Q5-2 Separate parts of the consolidation workpaper are used to develop the consolidated income statement, retained earnings statement, and balance sheet. All eliminating entries needed to complete the entire workpaper normally are entered before any of the three statements are prepared. The income statement portion of the workpaper is completed first so that net income can be carried forward to the retained earnings statement portion of the workpaper. When the retained earnings portion is completed, the ending balances are carried forward and entered in the consolidated balance sheet portion of the workpaper. Q5-3 Income assigned to noncontrolling shareholders in the consolidated income statement is based on the reported net income of the subsidiary. As illustrated in the chapters that follow, when a subsidiary has recorded profit on a transaction with a related company, the income assigned to noncontrolling shareholders must be adjusted for the effects of any unrealized profits as well. Q5-4 None of the dividends declared by the subsidiary are included in the consolidated retained earnings statement. Those which are paid to the parent have not gone outside the consolidated entity and therefore must be eliminated in preparing the consolidated statements. Those paid to noncontrolling shareholders are treated as a reduction in the net assets assigned to noncontrolling interest and also must be eliminated. Q5-5 All the revenue and expenses of the subsidiary resulting from transactions with nonaffiliates are included in the consolidated income statement under current reporting practice. As a result, all the subsidiary's realized income is included in the consolidated income statement. Because consolidated net income includes only income assigned to the shareholders of the parent company, that portion of the income of the subsidiary assigned to the noncontrolling shareholders must be deducted in arriving at consolidated net income. Q5-6 Consolidated net income is that portion of the income of the total enterprise assigned to the shareholders of the parent company. Solutions Manual- Baker/Lembke/King, Advanced Financial Accounting, 6/e 171 Chapter 5 Q5-7 Revenue and expenses of the acquired company generally are included for the entire period even though the parent has purchased ownership sometime during the year. Because consolidated net income can include only an appropriate portion of the earnings subsequent to the date of acquisition, both the income assigned to those noncontrolling shareholders that remain at the end of the period and the earnings from the start of the year to the date of acquisition on the shares purchased must be deducted in computing consolidated net income. The amount treated as preacquisition income is in computing consolidated net income....
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