Advanced Accounting Homework Solutions

 

 McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2013Hoyle, Schaefer, Doupnik,

 Advanced Accounting,

11/e 3-1

CHAPTER 3CONSOLIDATIONS

SUBSEQUENT TOTHE DATE OF ACQUISITION

Answers to Discussion Questions

How Does a Company Really Decide which Investment Method to Apply?

Students can come up with dozens of factors that Pilgrim should consider in choosing itsinternal method of accounting for its subsidiary, Crestwood Corporation. The following is only apartial list of possible points to consider.

Use of the information. If Pilgrim does not monitor its

subsidiary’s

income levels closely,applying the equity method may be not be fruitful. A company must plan to use the databefore the task of accumulation becomes worthwhile. For example, Crestwood may use theinformation fo

r evaluating the performance of the subsidiary’s managers.

Size of the subsidiary. If the subsidiary is large in comparison to Pilgrim, the effort requiredof the equity method may be important. Income levels would probably be significant.However, if the subsidiary is actually quite small in relation to the parent, the impact mightnot be material enough to warrant the extra effort.

Size of dividend payments. If Crestwood distributes most of its income as dividends, thatfigure will approximate equity income. Little additional information would be accrued byapplying the equity method. In contrast, if dividends are small or not paid on a regular basis,a Dividend Income balance might vastly understate the profits to be recognized by thebusiness combination.

Amount of excess amortizations. If Pilgrim has paid a significant amount in excess of bookvalue, its annual amortization charges are high, and use of the equity method might bepreferred to show the amortization effect each reporting period. In this case, waiting untilyear end and recording all of the expense at one time through a worksheet entry might notbe the best way to reflect the impact of the expense.

Amount of intra-entity transactions. As with amortization, the volume of transfers can be animportant element in deciding which accounting method to use. If few intra-entity sales aremade, monitoring the subsidiary through the application of the equity method is lessessential. Conversely, if the amount of these transactions IS significant, the added data canbe helpful to company administrators evaluating operations.

Sophistication of accounting systems. If Pilgrim and Crestwood both have advancedaccounting systems, application of the equity method may be relatively easy. Unfortunately,if these systems are primitive, the cost and effort necessary to apply the equity method mayoutweigh any potential benefits.

The timeliness and accuracy of income figures generated by Crestwood. If the subsidiaryreports operating results on a regular basis (such as weekly or monthly) and these figuresprove to be reliable, equity totals recorded by Pilgrim may serve as valuable information tothe parent. However, if Crestwood's reports are slow and often require later adjustment,Pilgrim's use of the equity method will provide only questionable results.

Надо звонить Стратмору. - Домой? - ужаснулся Бринкерхофф.  - Вечером в субботу. - Нет, - сказала Мидж.

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