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:
When a parent company acquires a subsidiary, it prepares consolidated financial statements to present the financial position and results of operations as if the parent and its subsidiaries are a single economic entity. In these consolidated statements, specific intercompany balances are eliminated to avoid double counting. One key area where differences occur is with the investment in consolidated subsidiaries.
On the parent company’s separate books, the investment in the subsidiary is recorded as an asset — usually at cost or at fair value if using the equity method. However, in the consolidated financial statements, this investment is eliminated against the parent’s share of the subsidiary’s equity (capital stock, retained earnings, etc.) to avoid showing the same value twice. The subsidiary’s individual assets and liabilities are then incorporated line-by-line into the consolidated balance sheet.
This is why the investment in consolidated subsidiaries appears on the parent company’s stand-alone balance sheet but does not appear on the consolidated balance sheet. It is replaced by the actual underlying assets, liabilities, revenues, and expenses of the subsidiary.
Let’s briefly look at the other options:
- a. Ending retained earnings:
The consolidated ending retained earnings usually matches the parent’s ending retained earnings unless there are non-controlling interests or other minor adjustments. - c. Investments in unconsolidated subsidiaries:
If a subsidiary is unconsolidated (e.g., the parent owns less than 50%), it would still appear on both the parent’s separate and consolidated statements, typically accounted for under the equity method or fair value. - d. Capital stock:
The consolidated financial statements show only the parent’s capital stock. The subsidiary’s stock is eliminated during consolidation.
In summary, because investment in consolidated subsidiaries is eliminated during consolidation but remains on the parent’s individual books, option b is the correct choice.