SM_Ch4 - CHAPTER 4 CONSOLIDATION OF WHOLLY OWNED...

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CHAPTER 4 CONSOLIDATION OF WHOLLY OWNED SUBSIDIARIES ANSWERS TO QUESTIONS Q4-1 An adjusting entry is recorded on the company's books and causes the balances reported by the company to change. Eliminating entries, on the other hand, are not recorded on the books of the companies. Instead, they are entered in the consolidation workpaper so that when the amounts included in the eliminating entries are added to, or deducted from, the balances reported by the individual companies, the appropriate balances for the consolidated entity are reported. Q4-2 The term differential is used to refer to the difference between the purchase price and the acquiring company's share of the book value of the subsidiary's net assets. It includes both the amounts to be assigned to individual assets and liabilities for differences between their book values and fair values and any residual amount to be assigned to goodwill. Q4-3 Negative goodwill arises when the purchase price is less than a proportionate share of the fair value of the identifiable net assets of the acquired company. It is allocated on a pro rata basis to all acquired assets except cash and cash equivalents, trade receivables, inventory, financial instruments that are required to be carried on the balance sheet at fair value, assets to be disposed of by sale, and deferred tax assets. Any remaining excess after other assets are reduced to zero is to be recognized as an extraordinary gain. Q4-4 A positive differential will occur whenever the purchaser pays more than book value for the proportionate share of ownership acquired. It may be that several of the assets have appreciated substantially in value and the purchaser actually pays more than book value but something less than a proportionate share of the fully appreciated total. Q4-5 Each of the stockholders' equity accounts of the subsidiary is eliminated in the consolidation process. Thus, none of the balances is included in the stockholders' equity accounts of the consolidated entity. That portion of the stockholders' equity claim assigned to the noncontrolling shareholders is reported indirectly in the balance assigned to the noncontrolling shareholders. Q4-6 Current consolidation standards include 100 percent of the book value of the subsidiary's individual assets and liabilities in the consolidated balance sheet. Once sufficient shares are acquired to qualify for consolidation, the actual level of ownership purchased does not affect the carryforward of book values to the consolidated statements. Q4-7 The full amount of the book value of the assets and liabilities held by the subsidiary is included. Solutions Manual – Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e 4 - 1
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Chapter 4 Q4-8 Using a clearing account can reduce the chance of error in preparing consolidated statements. The number of accounts requiring adjustment for the difference between book value and fair value at the date of acquisition may be very large. Rather
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This note was uploaded on 05/28/2010 for the course BUAD 2999 taught by Professor Gilbert during the Spring '10 term at Penn College.

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SM_Ch4 - CHAPTER 4 CONSOLIDATION OF WHOLLY OWNED...

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