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Tree, Inc., has held a 10 percent interest in the stock of Limb Company for several...

Tree, Inc., has held a 10 percent interest in the stock of Limb Company for several years. Because of the level of ownership, this investment has been accounted for using the fair- value method. At the beginning of the current year, Tree acquires an additional 70 percent interest, which provides the company with control over Limb. In preparing consolidated financial statements for this business combination, how does Tree account for the previous 10 percent ownership interest? Please(must be 400 words)

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Consolidated Statement of Income

The consolidated financial statements only report income and expense activity from outside of the economic entity. Any revenue earned by the parent that is an expense of a subsidiary is omitted from the financial statements. This is because the net change in the financial statements is $0. The revenue generated from one legal entity is offset by the expenses in another legal entity. To avoid overinflating revenues, all internal revenues are omitted.

Consolidated Balance Sheet

Certain account receivable balances and account payable balances are eliminated from the consolidated balance sheet. These eliminated amounts relate to the amounts owed to or from parent or subsidiary entities. Similar to the income statement, this is to simply reduce the balances reported as the net effect is $0. All cash, receivables, and other assets are reported on the consolidated as well as all liabilities owed to external parties.

ekkarill92 answered 1 year ago
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