Separate and Consolidated

Financial Statement -
Subsequent to Date of
Acquisition
Accounting for operating results of
wholly owned purchased subsidiaries

• A parent company may choose the equity method

or the cost method in accounting for the operating
results of purchased subsidiaries.
Equity Method
• The parent company recognizes its share of the
subsidiary's net income or loss and adjusted for the
depreciation and the amortization of the step up
on purchased subsidiary's net asset.
• The parent company also recognizes its share of
dividends declared by the subsidiary.
• Thus, the equity method is consistent with the
accrual basis of accounting.
• Equity method emphasizes the economic substance
of the parent-subsidiary.
• Dividends declared by subsidiaries are not revenue
to the parent company, rather, they are a
liquidation of a portion of the parent company's
investment in the subsidiary.
Cost Method
• Under this method, the parent company accounts
for the operations of a subsidiary only to the
extend that dividends are declared by the
subsidiary.
• This method emphasizes the legal form of the
parent-subsidiary relationship.
Choosing between Cost and Equity
Method
• Consolidated Financial Statements are the same
regardless of the method used to account for a
subsidiary's operations.
• The differences are in the working paper elimination.
• Equity Method is appropriate for both pooled and
purchased subsidiaries.
• The Cost Method is only appropriate for purchased
subsidiaries.