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Consolidations – Subsequent to the Date of Acquisition

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Chapter 3

Consolidations – Subsequent to the Date of Acquisition

Chapter Outline

I. Consolidation — the Effects Created by the Passage of Time

A. The present chapter examines the consolidation procedures that must be followed in subsequent periods whenever separate incorporation of the subsidiary is maintained.

B. Purchase combinations will continue to require a different set of procedures than a pooling of interests because of allocations and amortization.

C. A worksheet and consolidation entries continue to provide structure for the rendering of a single set of financial statements for the combined entity.

D. When a time factor is included in the consolidation process, additional complications are encountered.

1. The parent must select and apply an accounting method to cover the relationship between the two companies. The investment balance recorded by the parent varies over time as a result of the method chosen, as does the income consequently recognized.

2. The parent’s investment balance is eliminated on the worksheet so that the subsidiary’s actual assets and liabilities can be consolidated.

3. Additionally, the income figure accrued by the parent is excluded each period so that the subsidiary’s revenues and expenses can be included can be included when creating an income statement for the combined entity.

II. Investment Accounting by the Acquiring Company

A. Consolidation of a subsidiary becomes necessary for external reporting whenever control exists; but, for internal record-keeping, the parent has a choice of three alternatives for monitoring the activities of its subsidiaries:

1. the cost method,

2. the

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