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
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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
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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.
