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Consolidation Theories

Consolidation Theories - Accounting 401 Consolidation...

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Accounting 401 Consolidation Theories The first of the consolidation theories to be discussed below is the one we have been using for this semester. It is also the theory that is being applied by companies on a day-to-day basis. The other theories are interesting, but to date none of these other theories has replaced the Parent Company Concept. The FASB is looking into the issue of whether or not one particular theory should be applied by all companies, and, if so, what theory that should be. 1. Parent Company Concept a. Consolidation is based on parent’s interest in the fair market value of subsidiary’s net assets on the date of the purchase combination. b. The parent’s long-term investment account is assumed to include a proportionate share of the fair market value of subsidiary’s net assets. c. Minority interest in subsidiary net assets is calculated using the book value of subsidiary’s net assets and is reported as a non-current liability on the consolidated balance sheet. d. Goodwill is calculated as the difference between the investment cost and proportionate share of subsidiary’s net identifiable assets at fair market value on the date of the purchase combination. e. Consolidated working paper entries include an adjustment to subsidiary’s net assets at book value of parent’s share of the difference between fair market value and book value. 2. Entity (Economic Unit Concept)/Full Goodwill Method a. Consolidation is based on the fair market value of subsidiary’s net assets on the date of the purchase combination. b. Emphasizes control of the entire consolidated enterprise. Thus, consolidated financial statements are intended to provide information about the parent company and its subsidiaries as if they were a single entity.
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