chatter / wasilm,

thanks so much for your detailed explanation. I'm confused about the concept of consolidation. Would you please help?

(1) on the date of consolidation, is Neel's investment in subsidiary an asset, not equity? Neel's equity remains to be $16m. In consolidated FS, Neel's investment in subsidiary is credited and Pym's common stock & APIC is debited. The consolidated equity is $8m.

(2) on Dec 31, 2011, if the equity method is used, Neel has investment in Pym $8.6m and equity in earning $0.6m,. Thus, Neel's equity is $18.2m ($16m + $2.5m + $0.6m - $0.9m). Pym's equity is $8.6m.
In the consolidated FS, Neel's investment in Pym will be offset with Pym's equity. Therefore, the consolidated equity is only Neel's equity, i.e. $18.2m.

Consolidation takes place on a spreadsheet only unless push down accounting is implemented. The consolidation entries are never recorded in a G/L. So, if you are talking about parent's books then chatterr was right and the entry was correct. When you consolidate, you remove that entry ( on a spreadsheet only ) and replace it with the equity method entries. On that spreadsheet ONLY you will add parent's equitie and amount paid for the sub and earnings and subtract dividends.

1. On Neel's books the investment is an asset.

2. The investment account will increase by earnings and decrease by dividends and will show 7.7 mill (8 mill invested + 600k earnings - 900k dividends)

The consolidated numbers will be:

Stockholers' equity: $24mill

Earnings: $3.1mill

Retained earnings: -900k for dividends paid

But remember, the question is about consolidated numbers and not what Neel shows on its books.

But double check me...

The amount paid for the sub is theoretical sub's asset FV + goodwill if any. Paid, consideration given, asset FV with goodwill...is all the same.

There is no investment in sub account in consolidated FS. Sub's assets and goodwill will be included with parent's assets. Sub's assets are going to be reported at FV as opposed to parent's which are reported at cost. Refer to the formula in my first post. Parent's equity + consideration given ( amount paid or asset FV + goodwill) + earnings - dividends paid no matter by what company, that is what you see on consolidated FS which are computed on a separate spreasheet.

Did you read the chapter?