Franklin, Inc. owns 80% of Prevatt Company. During the current year, a portion of the investment...

Franklin, Inc. owns 80% of Prevatt Company. During the current year, a portion of the investment in Prevatt is sold. Prior to recording the sale, Franklin adjusts the book value of its investment. What is the purpose of the adjustment? (must be 400 words)

Expert Solution

Answer

Franlin Inc. holds more than 80% of the prevatt comapny, therefore it exercises signficant control over the Prevatt Company. As per US GAAP, in group accounts any change in parent ownership interest without loosing the control over subsidiary shall be acounted as an equity transaction.i.e investment to owners &distributions to owners acting in their capacity as owners.Following points need to be kept in mind:

a) no gain or loss shall be recognized in consolidated net income or comprehensive income.

b) The carrying amount of the noncontrolling interest shall be adjusted to reflect the change in its ownership interest in the subsidiary

c) Any difference between the fair value of the consideration received or paid and the amount by which the noncontrolling interest is adjusted shall be recognized in equity attributable to the parent.

In the books of parent, the gain or lloss sahll be calculated as under:

Sale proceeds - carrying value of shares sol(usually at cost)

ekkarill92 answered 1 year ago

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