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Advanced Accounting 1e Solutions Manuel Chap 3

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CHAPTER 3 CONSOLIDATION SUBSEQUENT TO DATE OF ACQUISITION
QUESTION SOLUTIONS
3-1. An 80 percent ownership requires the preparation of consolidated financial statements. Regardless of the method used to account for the investment on the parent’s financial records, the investment income or dividend income is replaced on the consolidated income statement by the subsidiary’s revenue and expense accounts. The equity method is required if the parent prepares separate financial statements. Search term “ownership” reveals 8 hits. The relevant item in this instance is paragraph 17, reproduced below: 17. The Board concludes that the equity method of accounting for an investment in common stock should also be followed by an investor whose investment in voting stock gives it the ability to exercise significant influence over operating and financial policies of an investee even though the investor holds 50% or less of the voting stock. Ability to exercise that influence may be indicated in several ways, such as representation on the board of directors, participation in policy making processes, material intercompany transactions, interchange of managerial personnel, or technological dependency. Another important consideration is the extent of ownership by an investor in relation to the concentration of other shareholdings, but substantial or majority ownership of the voting stock of an investee by another investor does not necessarily preclude the ability to exercise significant influence by the investor. The Board recognizes that determining the ability of an investor to exercise such influence is not always clear and applying judgment is necessary to assess the status of each investment. In order to achieve a reasonable degree of uniformity in application, the Board concludes that an investment (direct or indirect) of 20% or more of the voting stock of an investee should lead…...

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