Depreciation in Consolidated Financial Statements Suppose Company P buys 100% of

Question

Depreciation in Consolidated Financial Statements Suppose Company P buys 100% of the common stock of Company S for more than the book value of S. After one year, the consolidated entity prepares financial statements. Two expense items appear on the consolidated income statement that are not on the individual statements of P and S: Depreciation on equipment in excess of that in the individual statements Write-off of goodwill Explain why these two accounts exist. That us, what was there about the acquisition that generated the need for these two accounts? Market-Value Method, Equity Method, and Total Assets Suppose Pixar plans to buy about 20 percentage of the common shares of a small animation company that recently went public. The management of Pixar believes that patents developed by the software company very valuable in a year or two. Near-term profits may not be high, but large increases in the share price are likely. No dividends are expected. How would the choice of accounting method, the market-value method or the equity method, affect Pixar's total assets reported on its balance sheet in the next couple years if its expectations about the software firm come true? How would Pixar achieve its preferred accounting method? Explain.

Explanation / Answer

Under the market value method and equity method the original purchase cost would be reported on the books, where they differ is how earnings or losses are reported. Under the equity method you use the companies yearly earnings or losses to calculate losses or profits where as in the market value method you use the stock price increase or decrease. In order to keep the earnings off the books for a longer period of time the equity method would be used. In other words the equity in the company or amount of the company owned. As long as the shares arent sold and no dividends are paid, the equity method is the best option financially and legally.

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