Week 2

     

    • Explain the entity theory and parent company theories of consolidations.
    • Identify one drawback of each method.
    • Suggest to management a strategy to overcome each drawback.
      • Be sure to provide a rationale for your suggestion.

    Respond:

     

    Consolidated financial statement theories

    what is entity theory?

    Consolidated financial statements created using the entity /contemporary theory approach:

    1. combines in totality the entity created by the parent company and the subsidiary.
    2. give value to various groups including the parent company shareholders, non-controlling shareholders of the subsidiary, and creditors.
    3. net income includes total net income of both parent and subsidiary, whereby, controlling, and non-controlling share of subsidiary net income are distributed thus.
    4. total unrealized gain or loss is eliminated.

    One drawback: when the parent can exert total control over the subsidiary, the shares held by non-controlling stockholders is insignificant with regards to equity ownersh

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