1. Finn Company purchases all of the common stock of Murray Company for $375,000
ID: 2460952 • Letter: 1
Question
1. Finn Company purchases all of the common stock of Murray Company for $375,000 when Murray Company has $150,000 of common stock and $225,000 of retained earnings. If a consolidated balance sheet is prepared immediately after the acquisition, what amounts are eliminated in consolidation? Explain.
2. Bradshaw Company owns 100% of Dee Company. At year-end, Dee owes Bradshaw $150,000 arising from a loan made during the year. If a consolidated balance sheet is prepared at year-end, how is the $150,000 handled? Explain.
Explanation / Answer
1)If a consolidated balance sheet is prepared immediately after the acquisition, the retained earnings is eliminated in consolidation.
• Consolidated retained earnings is that portion of the undistributed earnings of the consolidated enterprise accruing to the shareholders of the parent company.
• Only those dividends paid to the owners of the consolidated entity can be included in the consolidated retained earnings statement. Because the owners of the parent company are considered to be the owners of the consolidated entity, only dividends paid by the parent company to its shareholders are treated as a deduction in the consolidated retained earnings statement; dividends of the subsidiary are not included.
• In the absence of unrealized profits from intercompany transactions and goodwill impairment, consolidated retained earnings and the parent’s equity-method retained earnings are normally equal. If the parent uses the equity method on its books, the retained earnings of each subsidiary is completely eliminated when the subsidiary is consolidated.
2)$150,000 loan amount is eliminated in consolidation of Financial Statements of Bradshaw Co and Dee Co.
In consolidation of Financial Statements of inter companies, full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities are eliminated.
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