Consolidating information in option transactions Wecam sey 100 com
Consolidated financial statements show the parent and the subsidiary as one single entity.
During the year, the parent company can use the equity or the cost method to account for its investment in the subsidiary. However, at the end of the year, a consolidation working paper is prepared to combine the separate balances and to eliminate the intercompany transactions, the subsidiary’s stockholder equity and the parent’s investment account.
Treatment of Purchase Differentials: At the time of purchase, purchase differentials arise from the difference between the cost of the investment and the book value of the underlying assets.
Purchase differentials have two components: Purchase differentials need to be amortized over their useful life; however, new accounting guidance states that goodwill is not amortized or reduced until it is permanently impaired, or the underlying asset is sold.
When the amount of stock purchased is more than 50% of the outstanding common stock, the purchasing company has control over the acquired company.
Control in this context is defined as ability to direct policies and management.
In this type of relationship the controlling company is the parent and the controlled company is the subsidiary.
The parent company needs to issue consolidated financial statements at the end of the year to reflect this relationship.
To account for this type of investment, the purchasing company uses the equity method.There may be amalgamations, either by transfer of two or more undertakings to a new company, or to the transfer of one or more companies to an existing company".Consolidation is the practice, in business, of legally combining two or more organizations into a single new one.The purchasing company uses the cost method to account for this type of investment.Under the cost method, the investment is recorded at cost at the time of purchase.