Morgan Bertone Chapter 3 Advanced Accounting

1. a. The parent accrues income when earned by the subsidiary and dividend receipts are recorded as a reduction in the investment account. The excess of fair value are amortized or an intra-entity transaction reflects the parents financial records. Advantage: provided [arent accurate information concerning subsidiarys impact on consolidated totals and disadvantage is it is usually complicated to apply b. The initial method recognizes only the subsidiarys dividends as income while the assets balance remains at acquisition-records date. The advantage is it is simple and provides a measure of cash flows between two companies. c. Partial equity method, the parent accrues the subsidiarys income as earned but does not record adjustments that might be required by excess fair-value amortizations or intra-entity transfers. Advantage is it is easier to apply then equity but the disadvantage is that in many cases the parents income is reasonable approximation of the consolidated totals. 2. a. Equipment is taken on by the parent company and the subsidiary balances are included after adjusting for the acquisition-date fair values. May need to be depreciated. b. Investment in Williams, asset account by parent is eliminated so that it is zero. c. Dividends Paid- income is recognized by is eliminated and is replaces by subsidiaries the revenues and expenses d. Goodwill- the original fair value allocation is included. e. Revenues- parent revenues are included and subsidiaries revenues are included but only for the period since the acquisition. f. Expenses- Parent expenses are included and subsidiary expenses are included on for the period since the acquisition. Amortization expenses are included. g. Common Stock- parent balances only are included although they will have been adjusted at the acquisition date if stock was issued. h. Net Income or retained earning only the parent balance is included. 3. When a parent company used the equity method both the parent net income and retained earning account balances the consolidated totals because the stockholders equity section of the balance sheet is being written off to the investment account as well as the assets they have been accrued for depreciation and amortization. The investment account is increased by the income and decreased by the dividends. All these journals entries create the number being equal to the consolidated totals. 4. The necessity is removing amortization is that the income needs to be accrued by the amortization meaning that the income would be overstated if you did not take the amortization

out. Your expenses would be overstated therefore the accountant need to do income less expense to come up with the I journal entry number. 5. The necessity of this entry is to accrue the net effect of the subsidiarys operations for the prior years and to reflect the two years of amortization expense. Therefore the net incomes in prior years are subtracted from the original investment to come up with number for that journal entry. The equity method does not do this because for the other two entries it is essential that the entry adjust the opening retained earnings of the acquiring company to the balance, it would have been in the equity method was applied. 6. The debt will be handled by intra-entity transfers therefore they will be removed for the consideration in any subsequent period. The journal entries in SADIE will remove all the intraentity receivables and payables. 7. The investment account is continually adjusted for the income and dividends for each of the six years they have owned the company. It also includes the amortization and depreciation expenses. It is adjusted to continually adjust to reflect the ownership of the acquired company. 10. A contingent payment is accounted for as a liability because the company must estimate the fair value of the liability for the future. They can estimate it by looking at will it actually be paid, how many times will it be paid, and factor for time value of money. If they dont put it on their books as a liability they are overstating their assets and understating their liabilities. 11. Push down accounting is used when the subsidiaries adjust their account balances to recognize the allocations and goodwill stemming from the parent acquisition. Subsequent amortization is recorded in the subsidiary as an expense. The rationale for the push down is it is required by the SEC for separate statements of the subsidiary only when no substantial outside ownership exists.