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Unformatted text preview: 85 Chapter 4 CONSOLIDATION TECHNIQUES AND PROCEDURES Answers to Questions 1 Consolidated financial statements are not affected by the method used by the parent company in accounting for its subsidiary investments. Such statements are the same regardless of whether the parent company uses the cost method, the equity method, or an incomplete equity method in accounting for its subsidiary investments. The working paper adjustments will be different, however, depending on how the parent company accounts for its subsidiary investments. 2 The standard method of accounting for equity investments of 20 percent or more is the equity method. But if the parent company issues only consolidated financial statements as the statements of the primary reporting entity, and the consolidated financial statements are correct, it makes no difference how the records of the parent company are maintained. The Financial Accounting Standards Board (and its predecessor organization) established standards for external reporting but not for maintenance of internal accounting records. 3 Under the equity method, a parent company amortizes patents from its subsidiary investments by adjusting its subsidiary investment and subsidiary income accounts. Since patents and patent amortization accounts are not recorded on the parent company's books, they are created for consolidated statement purposes through working paper entries. 4 Minority interest expense is entered in the consolidation working papers by preparing a working paper adjusting entry in which minority interest expense is debited and minority interest is credited. The minority interest expense (debit) is carried to the consolidated income statement as a deduction, and the credit to minority interest for minority interest income is added to the beginning minority interest. This is the approach illustrated throughout this text. An alternative approach for entering minority interest income in the consolidation working papers is to compute minority interest income (or loss) independently, and to enter the amount as an addition (deduction for loss) to in the minority interest column and as a deduction (an addition) to consolidated net income. 5 Working paper procedures for the investment in subsidiary, income from subsidiary, and subsidiary equity accounts are alike in regard to the objectives of consolidation. Regardless of the configuration of the working paper entries, the final result of adjustments for these items is to eliminate them through working paper entries. In other words, the investment in subsidiary, income from subsidiary, and the capital stock, additional paid-in capital, retained earnings, and other stockholders' equity accounts of the subsidiary never appear in consolidated financial statements....
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This note was uploaded on 04/04/2012 for the course ACCT 111 taught by Professor Bemo during the Spring '12 term at Nanyang Technological University.
- Spring '12