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Chapter 16 - Solution Manual

Company theorists argue that the parent and

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company theorists argue that the parent and subsidiary businesses operate for the benefit of parent company shareholders, rather than for the benefit of noncontrolling subsidiary stockholders. From the parent company’s perspective, the parent company has purchased an interest in each subsidiary that it controls. The parent company paid to obtain subsidiary shares. If less than 100% of the shares of any subsidiary is owned by the parent company, the amount paid to acquire control of the net assets of a subsidiary is less than 100% of the value of those net assets on the acquisition date. Any additional amount paid to purchase subsidiary shares is assumed to have been spent to purchase the parent company’s share of the subsidiary’s goodwill. From the parent company’s perspective, reporting only the amount of goodwill that is purchased by the parent company is consistent with the historical cost principle. The remaining amount of goodwill was not purchased. Since the historical cost principle implies that the initial cost of an asset is equal to the price paid for it plus all costs necessary to acquire it and get it ready for its intended use, the amount of goodwill purchased by the parent company is its historical cost. An additional argument for reporting only the portion of goodwill that is purchased by the parent company is the argument that the parent may have paid more to acquire subsidiary shares in order to obtain control of the subsidiary. This extra amount is called a control premium. If a control premium was paid, the amount of the purchase price assigned to goodwill is equal to the value of purchased goodwill plus the control premium. Thus, by assigning all of the excess amount paid to purchase subsidiary shares to goodwill, means that the value reported as the purchase price of goodwill is overstated. So, if the parent company would then use the price paid to purchase subsidiary shares as a basis to infer the amount of the subsidiary’s total goodwill would result in an additional overstatement of goodwill. Team 2: Argue that Goodwill reported in balance sheets should be the amount of goodwill for the total company acquired. Your arguments should refer to entity theory. According to the entity theory, the parent company and its subsidiaries are a single entity. The consolidated group is an entity, separate from its owners. Thus, the emphasis is on control of the group of legal entities operating as a single unit. All of the assets belong to the entity. All of the debts are debts of the entity. And the income earned by investing in those assets is income to the consolidated entity rather than to either the parent company stockholders or to the subsidiary’s noncontrolling stockholders. Consequently, the purpose of consolidated statements is to provide information to all shareholders— parent company stockholders and outside noncontrolling stockholders of the subsidiaries. Stockholders (both parent company stockholders and stockholders that comprise the noncontrolling
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company theorists argue that the parent and subsidiary...

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