b. Entry to eliminate equity in subsidiary income against the investment account. 4. A third eliminating entry must then be made to eliminate the Investment account against subsidiary equity and to create an account for NCI, if any, and the fourth entry distributes the difference between implied and book value of equity acquired. 5. Next steps relate to basic workpaper concepts that do not differ between the Cost and Equity methods. 6. Comparison of Illustrations 4-2 and 4-7 brings out an important observation. The consolidated column of the workpaper is the same under the cost and equity methods. Thus, the decision to use the cost or equity method to record investments in subsidiaries that will be consolidated has no impact on the consolidated financial statements. Only the elimination process is affected. E. Example of Investment Carried at Equity—After Year of Acquisition 1. The preparation of the Computation and Allocation Schedule is the same as it was in the year of acquisition; that is, it does not need to be prepared again. The 9
Chapter 4 elimination process also follows the same procedures as in the year of acquisition (with current year amounts). A consolidated statements workpaper in this case is presented in Illustration 4-9. We next review the workpaper entries in general journal entry form. Note that although the Computation and Allocation Schedule does not change, the third eliminating entry (to eliminate the Investment account against the equity accounts of the subsidiary) will change to reflect the Retained Earnings balance of the subsidiary at the beginning of the current year and the corresponding change in the Investment account and in the NCI. 2. As in the year of acquisition, the equity in subsidiary account must be eliminated against the Investment in Subsidiary account. 3. Next, eliminate intercompany dividends against the Investment account under the equity method. This entry may, if desired, be combined with that in #2 above. 4. A third eliminating entry must then be made to eliminate the Investment account against subsidiary equity, and the fourth entry distributes the difference between implied and book value of equity acquired. 5. The only differences in the affiliates' account data as compared to the cost method workpaper appear in P Company's statements (and in the elimination columns). 6. Observe that the consolidated columns in Illustrations 4-4 and 4-9 are the same; regardless of the method used (cost or equity), the consolidated results are unaffected. Note that there is no need for a “reciprocity entry” under the equity method. F. Investment Carried at Complete Equity 1. Under the assumptions of the preceding illustration, the complete equity method and the partial equity method are identical, not only in the end result but also in the steps to consolidate. Under other assumptions, however, the two may differ in the steps (though not in the end result). Recall that the complete equity method is
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