Advanced Accounting

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Chapter1: Intercorporate Acquisitions and InvestAppendix 2B Consolidation and the Cost Method

Not all parent companies use the equity method to account for their subsidiary investments that are to be consolidated. The choice of the cost or equity method has no effect on the consolidated financial statements. This is true because the balance in the parent's investment account, the parent's income from the subsidiary, and related items are eliminated in preparing the consolidated statements. Thus, the parent is free to use either the cost method or some version of the equity method on its separate books in accounting for investments in subsidiaries that are to be consolidated.   Because the cost method uses different parent-company entries than the equity method, it also requires different eliminating entries in preparing the consolidation worksheet. Keep in mind that the consolidated financial statements appear the same regardless of whether the parent uses the cost or the equity method on its separate books.CONSOLIDATION—YEAR OF COMBINATION

To illustrate the preparation of consolidated financial statements when the parent company carries its subsidiary investment using the cost method, refer again to the Peerless Products and Special Foods example. Assume that Peerless purchases 100 percent of the common stock of Special Foods on January 1, 20X1, for $300,000. At that date, the book value of Special Foods as a whole is $300,000. All other data are the same as presented in Figures 2-4 and 2-5.Parent Company Cost-Method Entries

When the parent company uses the cost method, only two journal entries are recorded by Peerless during 20X1 related to its investment in Special Foods. Entry (21) records Peerless' purchase of Special Foods stock; entry (22) recognizes dividend income based on the $30,000 ($30,000 × 100%) of dividends received during the period:   No entries are made on the parent's books with respect to...