You have recently become the controller of Pair Corporation, a manufacturing enterprise that has begun a program of expansion through business combinations. On February 1, 2020, two weeks prior to your controllership appointment, Pair had completed the acquisition of 85% of the outstanding common stock of Sole Company for $225,000 cash, including out-of-pocket costs. You are engaged in a discussion with Pair's chief accountant concerning the appropriate accounting method for Pair's interest in Sole Company's operating results. The chief accountant strongly supports the accounting, offering the following arguments: cost method of 3. A parent company recognizes revenue under the cost method only when the subsidiary declares dividends. Such dividend revenue is consistent with the revenue realization principle of financial accounting. The Investment Income account recorded in the equity method of accounting does not fit the definition of realized revenue. 4. Use of the equity method of accounting might result in Pair's declaring dividends to its shareholders out of "paper" retained earnings that belong to Sole. 5. The cost method is consistent with other aspects of historical-cost accounting, because working paper eliminations, rather than journal entries in ledger accounts, are used to recognize amortization of differences between current fair values and carrying amounts of Sole's identifiable assets. Required Prepare a reply to each of the chief accountant's arguments.
You have recently become the controller of Pair Corporation, a manufacturing enterprise that has begun a program of expansion through business combinations. On February 1, 2020, two weeks prior to your controllership appointment, Pair had completed the acquisition of 85% of the outstanding common stock of Sole Company for $225,000 cash, including out-of-pocket costs. You are engaged in a discussion with Pair's chief accountant concerning the appropriate accounting method for Pair's interest in Sole Company's operating results. The chief accountant strongly supports the accounting, offering the following arguments: cost method of 3. A parent company recognizes revenue under the cost method only when the subsidiary declares dividends. Such dividend revenue is consistent with the revenue realization principle of financial accounting. The Investment Income account recorded in the equity method of accounting does not fit the definition of realized revenue. 4. Use of the equity method of accounting might result in Pair's declaring dividends to its shareholders out of "paper" retained earnings that belong to Sole. 5. The cost method is consistent with other aspects of historical-cost accounting, because working paper eliminations, rather than journal entries in ledger accounts, are used to recognize amortization of differences between current fair values and carrying amounts of Sole's identifiable assets. Required Prepare a reply to each of the chief accountant's arguments.
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Chapter16: Retained Earnings And Earnings Per Share
Section: Chapter Questions
Problem 25P: The controller of Red Lake Corporation has requested assistance in determining income, basic...
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You have recently become the controller of Pair Corporation, a manufacturing enterprise that has begun a program of expansion through business combinations. On February 1, 2020, two weeks prior to your controllership appointment, Pair had completed the acquisition of 85% of the outstanding common stock of Sole Company for $225,000 cash, including out-of-pocket costs. You are engaged in a discussion with Pair's chief accountant concerning the appropriate accounting method for Pair's interest in Sole Company's operating results. The chief accountant strongly supports the accounting, offering the following arguments: cost method of
3. A parent company recognizes revenue under the cost method only when the subsidiary declares dividends. Such dividend revenue is consistent with the revenue realization principle of financial accounting. The Investment Income account recorded in the equity method of accounting does not fit the definition of realized revenue.
4. Use of the equity method of accounting might result in Pair's declaring dividends to its shareholders out of "paper" retained earnings that belong to Sole.
5. The cost method is consistent with other aspects of historical-cost accounting, because working paper eliminations, rather than journal entries in ledger accounts, are used to recognize amortization of differences between current fair values and carrying amounts of Sole's identifiable assets.
Required Prepare a reply to each of the chief accountant's arguments.
Transcribed Image Text:You have recently become the controller of Pair
Corporation, a manufacturing enterprise that has begun a
program of expansion through business combinations. On
February 1, 2020, two weeks prior to your controllership
appointment, Pair had completed the acquisition of 85%
of the outstanding common stock of Sole Company for
$225,000 cash, including out-of-pocket costs. You are
engaged in a discussion with Pair's chief accountant
concerning the appropriate accounting method for Pair's
interest in Sole Company's operating results. The chief
accountant strongly supports the cost method of
accounting, offering the following arguments:
1. The cost method recognizes that Pair and Sole are
separate legal entities.
2. The existence of a 15% non-controlling interest in
Subsidiary requires emphasis on the legal separateness of
the two companies.
3. A parent company recognizes revenue under the cost
method only when the subsidiary declares dividends.
Such dividend revenue is consistent with the revenue
realization principle of financial accounting. The
Investment Income account recorded in the equity method
of accounting does not fit the definition of realized
revenue.
4. Use of the equity method of accounting might result in
Pair's declaring dividends to its shareholders out of
"paper" retained earnings that belong to Sole.
5. The cost method is consistent with other aspects of
historical-cost accounting, because
eliminations, rather than journal entries in ledger
working paper
used to recognize amortization of
accounts,
differences between current fair values and carrying
amounts of Sole's identifiable assets.
are
Required
Prepare a reply to each of the chief accountant's
arguments.
2
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