Joined: 11 Jun 2009
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Posted: 22 Jun 2009 at 18:39 | IP Logged
For internal reporting purposes, the parent has three choices for deciding what the carrying value of the "Investment in Sub" account will be:
1) Initial Value (or cost) method. Exactly what it sounds like. This is going to equal the fair value of the consideration transferred the date of acquisition. Stays the same from period to period; never adjusted. Dividends are considered income under this method. 2) Partial Equity method. Here the parent recognizes its share of sub income and reduces the balance for dividends recieved, but does not account for the excess amortization of fair value over book value. 3) Equity Method. Exactly like partial equity, except now the parent also includes excess amortization of fair value over book value.
Which method the parent uses doesn't really matter because for consolidation purposes, Entry *C makes whatever adjustment is necessary to the investment account to make its balance equal whatever it would have been if the equity method had been followed.
As for the eliminating journal entries, they are always made on the date of acquisition. If the companies remain separate in legal form, but in substance function as one entity, then the eliminating entries will have to be made every reporting period for the purposes of creating consolidated financial statements. Obviously if one of the companies ceases being a legal entity there is no reason for eliminating entries.
Joined: 29 Dec 2009 Location: United States
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Posted: 26 Jan 2010 at 13:50 | IP Logged
Hello Shilpa, Wow your scores are amazing. I am appearing for the FAR in mid April. This would be first subject. this blog is great help for me. thanks archana
shilpjain wrote:
Black corps accounts payable as at Dec 31 1989 totaled 900,000 before any necessary adjustments were made for the following transactions : On dec 27, 1989 , Black wrote and recorded checks to creditors totalling 400,000.The checks were mailed out on Jan 10,1990 . At Dec 31 , 1989 , what amount should Black report as total accounts payable ?
Beckers solution : Accounts Payable Balance per books before y/e adjustments $ 900,000
Add: Checks written on 12/27/89 (which reduced A/P) but not mailed until 1/10/90. 400,000
My question is , why would we add this amount of $400,000 to the A/P balance , since the check is already written . If the check is already written , that means A/P is reduced in the books . how does it matter , when the check gets mailed ?
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Topic: FAR - Becker Questions
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