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Unformatted text preview: 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 differential represents the difference between the acquisition-date fair value of the acquiree and its book value. Q4-3 A company must acquire a subsidiary at a price equal to the subsidiary’s fair value, and that subsidiary must have a total acquisition-date fair value less than its book value. Q4-4 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. Q4-5 Current consolidation standards require recognition of the fair value of the subsidiary's individual assets and liabilities at the date of acquisition. At least some portion of the book value would not be included if the fair value of a particular asset or liability was less than book value. Q4-6 One hundred percent of the fair value of the subsidiary’s assets and liabilities at the date of acquisition should be included. The type of asset or liability will determine whether a change in its value will be recognized following the date of acquisition. Q4-7 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 than including all such adjustments along with other eliminations in a single eliminating entry, it is often easier to place the unamortized balance in a differential clearing account and then use one or more subsequent entries to assign the clearing account balance to the appropriate individual accounts or account groups. Q4-8 The differential account is a clearing account. Each time consolidated statements are prepared, the balance in the investment account is eliminated and the unamortized portion of the differential is entered in the clearing account. It then is assigned to the appropriate asset and liability accounts. This same process is followed each time consolidated statements are prepared. The eliminating entries do not actually remove the balance in the investment account from the parent's books; thus, the differential continues to be a part of the investment account balance until fully amortized....
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