Question

If you had to choose among the current method of consolidation for combinees where the combinor...

If you had to choose among the current method of consolidation for combinees where the combinor owns at least 50%, the new entity approach, or proportionate consolidation, which would you choose? Explain.

Textbook: Accounting Theory: Conceptual Issues in a Political and Economic Envirnoment (9th edition) by Wolk, Dodd & Rozycki

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Answer #1

Answer:

For the purpose of consolidation, if the combinor owns atleast 50% of the combinees, the new entity approach will be used.

Explanation:

A. New entity approach: The method is used for the purposes of consolidation when the entity exercises control over the other entity. Owning more than 50% of the other entity represents exercising control over that entity. Under this method of consolidation, the fair values of the parent and the subsidiary are added together to form a new basis of accountability for the ongoing economic entity.

B. Proportionate consolidation: This method is used to report a firm's proportionate interest in a joint venture. Under this method, proportionate assets and liabilities (to the extent of ownership in the joint venture) will be consolidated with the parent entity.

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