Week 2

• Explain the entity theory and parent company theories of consolidations.
• Identify one drawback of each method.
• Suggest to management a strategy to overcome each drawback.
  • Be sure to provide a rationale for your suggestion.

Respond:

Consolidated financial statement theories

what is entity theory?

Consolidated financial statements created using the entity /contemporary theory approach:

1. combines in totality the entity created by the parent company and the subsidiary.
2. give value to various groups including the parent company shareholders, non-controlling shareholders of the subsidiary, and creditors.
3. net income includes total net income of both parent and subsidiary, whereby, controlling, and non-controlling share of subsidiary net income are distributed thus.
4. total unrealized gain or loss is eliminated.

One drawback: when the parent can exert total control over the subsidiary, the shares held by non-controlling stockholders is insignificant with regards to equity ownersh