Which of the following internal record-keeping methods can a parent choose to account for a subsidiary acquired in a business combination?
Initial value, equity, or partial equity.
A parent company can choose to utilize any of the following internal record-keeping methods to account for a subsidiary acquired in a business combination:
1. Cost Method – In this method, the parent company records the subsidiary investment at cost. The business combination’s acquisition cost is used as the initial investment value. From this point forward, earnings from the subsidiary are recorded as dividend income.
2. Equity Method – In this method, the parent company’s investment in the subsidiary is initially recorded at cost. However, as the subsidiary earns income, the parent company’s share of earnings is added to the investment account. This method requires the parent company to prepare equity and income statements for the subsidiary.
3. Consolidation Method – This method is more complex and is commonly used for financial reporting purposes. The financial statements of both the parent company and the subsidiary are combined into one set of financial statements. The parent company must account for all of the subsidiary’s assets, liabilities, and equity in its consolidated financial statements.
It is important to note that the parent company’s choice of internal record-keeping method should comply with the generally accepted accounting principles (GAAP) to guarantee financial statement accuracy and dependability.
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