Complete two exercises in accounting for outside ownership (noncontrolling interest) and eliminating intercompany transactions, resulting in unrealized gains and losses.
It is not necessary for a parent company to acquire all of a subsidiary’s stock in order to form a business combination. In fact, when one company acquires control of a subsidiary company, the ownership interest of the parent company is sometimes less than 100 percent. All that is required in a combination is control over the decision-making process; this is usually achieved by acquiring a majority of the voting shares.
Ownership of any subsidiary stock that is retained by outside, unrelated parties is called noncontrolling interest. A consolidation may become quite complex when there is noncontrolling interest. The involved subsidiary owners and their equity must be recognized by the parent company in its consolidated financial statements. The valuation of the subsidiary’s assets and liabilities may also be a challenge with there is noncontrolling interest and the acquisition method is followed. Clearly, noncontrolling interest issues are often present, and a central issue is how the financial statements are presented for both entities.
In Assessment 1, you analyzed the deferral and subsequent recognition of gains that were created by inventory transfers between two affiliated companies in connection with equity method accounting. In that case, intra-entity profits were not realized until the earning process culminated in a sale to an unrelated party. A similar process can be applied to transactions between companies within a business combination. Be mindful that sales within a single economic entity create neither profits nor losses.
The opportunity for direct acquisition of assets (e.g., inventory) is often a reason for the creation of the business combination. Because the transaction was not made with an outside, unrelated party, the sales and purchases created by the transfer must be accounted for by accountants with each entity. This is true regardless of the asset, be it inventory, land, or depreciable assets.
The following resources are required to complete the assessment.
Complete the problems in the Assessment 2 Problems document using the related template, both of which are linked in the Required Resources for this assessment. All financial information and applicable instructions are provided.
In these problems you will:
By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:
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