Subsequent to an acquisition, the parent company and consolidated financial statement amounts would not be the same for Select one:
a. ending retained earnings.
b. investments in consolidated subsidiaries.
c. investments in unconsolidated subsidiaries.
d. capital stock.
The correct answer and explanation is :
The correct answer is: b. investments in consolidated subsidiaries.
Explanation:
After an acquisition, the parent company prepares both individual (parent-only) financial statements and consolidated financial statements. The consolidated financial statements present the financial position and results of operations of the parent and its subsidiaries as a single economic entity. This leads to important differences between certain items in the parent-only and consolidated financial statements.
Let’s examine each option:
a. Ending Retained Earnings:
The ending retained earnings of the parent company and the consolidated group are usually the same, assuming the parent owns 100% of the subsidiary. This is because the consolidated retained earnings begin with the parent’s retained earnings and are adjusted for the parent’s share of consolidated net income and dividends. The subsidiary’s retained earnings are eliminated in consolidation.
b. Investments in Consolidated Subsidiaries (Correct Answer):
In the parent company’s individual financial statements, the investment in a subsidiary is recorded as a non-current asset under the equity method or at cost, depending on the accounting policy. However, in the consolidated financial statements, the investment account is eliminated during the consolidation process. The subsidiary’s assets, liabilities, revenues, and expenses are combined line-by-line with those of the parent, and any intercompany investment is eliminated. Hence, this item would not match between the parent and consolidated financials.
c. Investments in Unconsolidated Subsidiaries:
Unconsolidated subsidiaries (typically those where the parent owns less than 50%) are not fully consolidated, so the investment account is maintained in both the parent and consolidated financials—they usually match in both statements.
d. Capital Stock:
Capital stock represents the equity of the parent company only and does not change due to consolidation. The consolidated financial statements reflect only the parent’s capital stock, not that of the subsidiaries.
Summary:
Only the investment in consolidated subsidiaries is eliminated during consolidation, making option b the correct choice.