Advanced Financial Accounting

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CHAPTER 4 Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value ANSWERS TO QUESTIONS Q4-1 The carrying value of the investment is reduced under equity method reporting when (a) a dividend is received from the investee, (b) a differential is amortized, (c) an impairment of goodwill occurs, and (d) the market value of the investment declines and is less than the carrying value and it is concluded the decline is other than temporary. Q4-2 A differential occurs when an investor pays more than or less than underlying book value in acquiring ownership of an investee.…show more content…
The existence of a large differential indicates the parent paid well over book value to acquire ownership of the subsidiary. When the differential is assigned to identifiable assets or liabilities of the subsidiary, both the consolidated balance sheet and consolidated income statement are likely to provide information not available in the financial statements of the individual companies. The consolidated statements are likely to provide a better picture of the assets actually being used and the resulting income statement charges that should be reported. Q4-10 Consolidated net income is equal to the parent’s income from its own operations, excluding any investment income from consolidated subsidiaries, plus the income of each of the consolidated subsidiaries, adjusted for any differential write-off. Q4-11 An additional eliminating entry normally must be entered in the worksheet to expense an appropriate portion of the amount assigned to buildings and equipment. Normally, depreciation expense is debited and accumulated depreciation is credited. Q4-12 If the differential arises because the fair value of land, or some other non-depreciable asset, held by the subsidiary is greater than book value, the
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