Question

In: Accounting

A. When a parent obtains control over a subsidiary, the carrying amounts of the subsidiary’s assets...

A. When a parent obtains control over a subsidiary, the carrying amounts of the subsidiary’s assets at the date of acquisition are compared to fair value. If there are differences between these values, adjustments are required to be made in the consolidation worksheets. Explain why.

B. Which asset that is acquired is not measured at fair value?

250 words EACH

Expert Solution

Consolidation iworksheet iis ia itool iused ito iprepare iconsolidated ifinancial istatements iof ia iparent iand iits isubsidiaries. iIt ishows ithe iindividual ibook ivalues iof iboth icompanies, ithe inecessary iadjustments iand ieliminations iand ithe ifinal iconsolidated ivalues.

. iIn ia istatutory imerger, ithe iacquire i(the itarget) idissolves iand ithe iacquirer i(the iparent) iabsorbs iit. iBecause isuch ia ibusiness icombination ileads ito ia isingle icombined ientity, ithe iaccounting irecords iof ithe iacquirer iand iacquire iare ipermanently iconsolidated.. iConsolidation iworksheet ihelps iin ithe isimulation iconsolidation irequired iat ieach ireporting idate.

The iparent iholds ia icontrolling iinterest iin ithe isubsidiary icompany, imeaning iit ihas ior icontrols imore ithan ihalf iof iits istock. iIn icases iwhere ia isubsidiary iis i100% iowned iby ianother ifirm, ithe isubsidiary iis ireferred ito ias ia iwholly iowned isubsidiary. iSubsidiaries ibecome ivery iimportant iwhen idiscussing ia ireverse itriangle imortgage.

How ia iSubsidiary iWorks

A iparent icompany ibuys ior iestablishes ia isubsidiary ito iprovide ithe iparent iwith ispecific isynergies, isuch ias iincreased itax ibenefits, idiversified irisk, ior iassets iin ithe iform iof iearnings, iequipment, ior iproperty. iStill, isubsidiaries iare iseparate iand idistinct ilegal ientities ifrom itheir iparent icompanies, iwhich ireflects iin ithe iindependence iof itheir iliabilities, itaxation, iand igovernance. iIf ia iparent icompany iowns ia isubsidiary iin ia iforeign iland, ithe isubsidiary imust ifollow ithe ilaws iof ithe icountry iwhere iit iis iincorporated iand ioperates

A iparent icompany iis ia icompany ithat ihas ia icontrolling iinterest iin ianother icompany, igiving iit icontrol iof iits ioperations. iParent icompanies ican ibe ieither ihands-on ior ihands-off iowners iof iits isubsidiaries, idepending ion ithe iamount iof imanagerial icontrol igiven ito isubsidiary imanagers, ibut iwill ialways imaintain ia icertain ilevel iof iactive icontrol.

How ia iParent iCompany iWorks

Parent icompanies ican ibe iconglomerates, imade iup iof ia inumber iof idifferent, iseemingly iunrelated ibusinesses, ilike iGeneral iElectric i(GE), iwhose idiverse ibusiness iunits iare iable ito ibenefit ifrom icross-branding. iA iparent icompany, ihowever, iis idifferent ifrom ia iholding icompany. iParent icompanies iconduct itheir iown ibusiness ioperations, iunlike iholding ior ishell icompanies iwhich iare iset iup ispecifically ito ipassively iown ia igroup iof isubsidiaries—often ifor itax ipurposes.

ithey imay ibe ivertically iintegrated, iby iowning iseveral icompanies iat idifferent istages ialong ithe iproduction ior ithe isupply ichain. iFor iinstance, iAT&T’s iacquisition iof iTime iWarner imeant ithat iit ibecame iowner iof iboth ithe ifilm iproduction ibusiness iand ibroadcasters ithat isold ithose iproductions ito iaudiences, iin iaddition ito iits itelecommunications inetworks ithat iprovided ithe imedia iinfrastructure.

Consolidation iprocess

§ step i1: iobtain ithe iindividual ifinancial istatement iof ithe iparent iand ithe isubsidiary;

§ Step i2: iidentify ithe ifair ivalue iof iconsideration itransferred iand ithe ifair ivalue iof inet iassets iof ithe isubsidiary iand iwork iout iif ithere iis iany igoodwill;

§ Step i3: ieliminate ithe iequity iaccounts i(i.e. icommon istock, iadditional ipaid-up icapital iand iretained iearnings) iand ithe iinvestment iin isubsidiary iaccount ias iit iappears iin ithe iindividual ifinancial istatements iof ithe iparent

§ Step i4: iadjust ifor iany igroup itransactions isuch ias iloans imade iand iunrealized igains iin iinventories isold ibetween ithe iparent iand ithe isubsidiary;

§ Step i5: ifind iout iconsolidated inet iincome; inet iincome iattributable ito inon-controlling iinterest iand iuse iit ito iwork iout iconsolidated iretained iearnings iand inon-controlling iinterest;

§ Step i6: icombine ithe iindividual ibook ivalues iof iassets iand iliabilities iand iequity iaccounts, iassociated ieliminating iand iadjusting ientries ito ifind iout iconsolidated ibalance isheet iaccounts.

Answer i2.

Fair ivalue iis ia iterm iwith iseveral imeanings iin ithe ifinancial iworld.

In iinvesting, iit irefers ito ian iasset's isale iprice iagreed iupon iby ia iwilling ibuyer iand iseller, iassuming iboth iparties iare iknowledgable iand ienter ithe itransaction ifreely. iFor iexample, isecurities ihave ia ifair ivalue ithat's idetermined iby ia imarket iwhere ithey iare itraded.In iaccounting, ifair ivalue irepresents ithe iestimated iworth iof ivarious iassets iand iliabilities ithat imust ibe ilisted ion ia icompany's ibooks

. iThe iparent icompany ibuys ian iinterest iin ia isubsidiary, iand ithe isubsidiary’s iassets iand iliabilities iare ipresented iat ifair imarket ivalue ifor ieach iaccount. iWhen ithe iaccounting irecords iof iboth icompanies iare icombined, ithe iresult iis ia iconsolidated ifinancial istatement, iwhich iis ia iset iof ifinancial istatements ithat ipresents ia iparent icompany iand ia isubsidiary ias iif ithe itwo ibusinesses iwere ione icompany.

Fair iValue iExample

The iuse iof ifair ivalue iin iaccounting ican ibe icomplicated, iand iit ihas ifigured ias ia itool iin icases iof icorporate ifraud. iOne iof ithe imost inotorious: iEnron iCorp. iIn ithe i1990s, isenior imanagement iat ithe igiant ienergy-trading iand iutility icompany iused ia itype iof ifair-value iaccounting—a iset iof iprinciples ifor idetermining ithe i“market" ivalue iof iassets iin iwhich ithere iis ino itrading iand ihence ino imarket—to iinflate ithe ivalue iof iits ienergy-delivery icontracts iand, ithus, iits irevenues. iOnce ithis ipractice, ialong iwith iother idubious iaccounting imethods, icame ito ilight, ithe icompany iquickly iunraveled, iand iit ifiled ifor iChapter i11 ibankruptcy ion iDec. i2, i2001.

ekkarill92 answered 2 years ago

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