Question

Is the full equity method the only option that the parent company has for internal reporting? Explain why or why not

Answer 1

The parent equity method occurs when the parent company of a wholly or majority-owned subsidiary accounts for its investment in the subsidiary’s stock or membership interests using the equity method. In this case the parent tracks its investment using the equity method. At the end of the accounting period, the parent eliminates the items that would result in double counting on the consolidated financial statements. This means eliminating each subsidiary’s retained earnings, dividend reductions and amortizations that appear on the unconsolidated books.

For internal purposes, the parent will use one of the following methods to account for the subsidiary: equity, initial value, or partial equity. The equity method is most commonly used. Companies use the equity method when they have substantial influence on the investee.The consolidated financial statements will be the same regardless of which method is used by the parent. For the partial equity method, the parent records entries like the equity method except it does not amortize the acquisition date fair value allocations. For the initial value method (also called the cost method), the parent records dividends received as revenue and does not record equity (income) for the subsidiary's income or amortize the fair value allocations.