Chapter 3 Hoyle Outline

Chapter 3 Hoyle Outline - Updated Sixth Edition Chapter 3...

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Updated Sixth Edition Chapter 3 Consolidations – Subsequent to the Date of Acquisition Chapter Outline I. Consolidation — the Effects Created by the Passage of Time A. The present chapter examines the consolidation procedures that must be followed in subsequent periods whenever separate incorporation of the subsidiary is maintained. B. Purchase combinations will continue to require a different set of procedures than a pooling of interests because of allocations and amortization. C. A worksheet and consolidation entries continue to provide structure for the rendering of a single set of financial statements for the combined entity. D. When a time factor is included in the consolidation process, additional complications are encountered. 1. The parent must select and apply an accounting method to cover the relationship between the two companies. The investment balance recorded by the parent varies over time as a result of the method chosen, as does the income consequently recognized. 2. The parent’s investment balance is eliminated on the worksheet so that the subsidiary’s actual assets and liabilities can be consolidated. 3. Additionally, the income figure accrued by the parent is excluded each period so that the subsidiary’s revenues and expenses can be included can be included when creating an income statement for the combined entity. II. Investment Accounting by the Acquiring Company A. Consolidation of a subsidiary becomes necessary for external reporting whenever control exists; but, for internal record-keeping, the parent has a choice of three alternatives for monitoring the activities of its subsidiaries: 1. the cost method, 2. the equity method, or 3. the partial equity method. B. Depending on the method applied, the acquiring company will record earnings from its ownership of the acquired company, and this total must be eliminated on the consolidated worksheet. 32 Advanced Accounting – Updated 6/e
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C. Under each one of these methods, the balance in the Investment account will also vary, and must be removed in producing consolidated financial statements. III. Subsequent Consolidations — Investment Recorded by the Equity Method A. For a purchase combination consolidated after the acquisition date, certain “elimination” procedures are required to avoid double-counting of items related to the combination. and if the acquiring company has applied the equity method, the following process is appropriate. 1. For example, if the Investment in Subsidiary account remains on the consolidated balance sheet, it would imply that the Parent has an investment interest in itself! This simply would not make sense. 2. These “elimination” entries are posted ONLY to the consolidated worksheet, and do not impact the general ledger accounts of either the parent company or the subsidiary company. 3.
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Chapter 3 Hoyle Outline - Updated Sixth Edition Chapter 3...

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