AA 6 - 7. Benns adopts the equity method for its 100...

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6. Several years ago, Jenkins Company acquired a controlling interest in Lambert Company. Lambert recently borrowed $100,000 from Jenkins. In consolidating the financial records of these two companies, how will this debt be handled? Solution: While consolidating the financial records of the two company all the debts borrowed by the subsidiary company from outside the group are shown in the consolidated balance sheet however the debts borrowed within the company is set off as contra items in the consolidated balance sheets. In this case as the Lambert company has borrowed from $100,000 from the controlling Jenkins, the standalone balance sheets of Lambert will show a debt of $100,000 and that of Lambert will show a loan asset of $100,000. Thus in consolidated balance sheets both will be set off with each other.
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Unformatted text preview: 7. Benns adopts the equity method for its 100 percent investment in Water. At the end of six years, Benns reports an investment in Waters of $920,000. What figures constitute this balance? Solution: Generally equity method is used when the investment in the company is not more than 50% and is not less than 20%. Equity method of reporting should be used when an investor holds substantial portion of the companys share but is not in complete control over the company. Thus even if the investor hold more than 50% share but does not control the company he can use equity method of reporting In this case the Benns reports $920,000 as his investment balance at end of 6 years. This includes the cost of his investment as increased or reduced by the increase or decrease in his net income / loss....
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