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Posted: April 20th, 2022
Explain the entity theory and parent company theories of consolidations.
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:
combines in totality the entity created by the parent company and the subsidiary.
give value to various groups including the parent company shareholders, non-controlling shareholders of the subsidiary, and creditors.
net income includes total net income of both parent and subsidiary, whereby, controlling, and non-controlling share of subsidiary net income are distributed thus.
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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Explain the entity theory of consolidations and the parent company theory of consolidations.
Identify one disadvantage of each method.
Provide management with a strategy for overcoming each disadvantage.
Make sure to explain why you think your suggestion is a good idea.
Respond:
Theories of consolidated financial statements
What exactly is entity theory?
Consolidated financial statements prepared using the entity/contemporary theory method:
combines the entity formed by the parent company and the subsidiary.
give value to various groups such as parent company shareholders, subsidiary non-controlling shareholders, and creditors
net income includes both parent and subsidiary net income, with controlling and non-controlling shares of subsidiary net income distributed accordingly.
The total unrealized gain or loss is removed.
One disadvantage is when the parent has complete control over the subsidiary.
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