Question

Assignment Choice #1: Consolidated Financial Statements Scenario

The first part is a scenario covering the topic of consolidated financial statements. The second part is the preparation of a consolidated financial statement. You will submit both parts separately.

Part 1: Scenario - Written

A new employee has been given responsibility for preparing the consolidated financial statements of Sample Company. After attempting to work alone for some time, the employee seeks assistance in gaining a better overall understanding of the way in which the consolidation process works. You have been asked to provide assistance in explaining the consolidation process. The employee is asking you to respond to the following questions. Please provide full explanations and use examples to support your work.

Why must the eliminating entries be entered in the consolidation worksheet each time consolidated statements are prepared?

How is the beginning-of-period noncontrolling interest balance determined?

How is the end-of-period noncontrolling interest balance determined? Provide an example.

Which of the subsidiary’s account balances must always be eliminated? Why?

Which of the parent company’s account balances must always be eliminated? Why?

Answer 1

1.Elimination is used to delete one partnership into another be it parent into subsidiary or subsidiary into parent. This is done to reflect the amounts that would appear if all legally separate companies were actually a single company. These entries must also be done each time consolidated financial statements are done because of changes over the year and the fact that these entries do not carry over from one period to another.

2. The beginning-of-period non-controlling interest is determined by the net assets on the subsidiarys books on the same date of elimination.

3. The determination for non-controlling interest at the end of the year is determined by the net income attributable to the non-controlling interest, as well as dividends declared to these outside owners. Thus, the balance is by adding the components found in the non-contorlling interest column. The beginning balance + allocation of current year net income less dividends paid to outsiders.

4. Equity here is the main concern. Stockholders' equity must be eliminated each time consolidation takes place because the subsidiary is being terminated and a stock holder has no roll left to play in that business. In essence, the subsidiary nor the stockholder has nothing to offer each other once the subsidiary is removed.

5. The parent must eliminate the income from the subsidiary. When the parent and subsidiary join and consolidate to form one entity, the parent will no longer have income coming from the disolution of the subsidiary. Thus, all intakes that were there when the parent had a partnership with the subsidary must be eliminated.