Asked by Michelle Mazur on Jun 16, 2024
Verified
One weakness associated with the fair value enterprise method is that:
A) it is inconsistent with the historical cost principle.
B) non-controlling interest (NCI) is computed using the fair market values of the subsidiary's net assets.
C) non-controlling interest (NCI) is computed using the book values of the subsidiary's net assets.
D) the implied value based on the parent's acquisition cost may be unrealistic when the parent purchases significantly less than 100% of the subsidiary's voting shares.
Non-Controlling Interest (NCI)
A portion of the equity in a subsidiary not owned by the parent company, representing the minority shareholders' interest in the company's net assets.
Historical Cost Principle
An accounting principle stating that assets should be recorded and reported at their original purchase price.
- Identify the distinctions between different consolidation methods, including the fair value enterprise method and the parent company method.
- Understand the treatment of negative goodwill and acquisition differentials in consolidated financial statements.
Verified Answer
KF
KaCee FrenchJun 19, 2024
Final Answer :
D
Explanation :
The fair value enterprise method assumes that the parent owns 100% of the subsidiary's voting shares, which may not be the case. Therefore, the implied value based on the parent's acquisition cost may be unrealistic when the parent purchases significantly less than 100% of the subsidiary's voting shares. This is a weakness associated with the fair value enterprise method. Choices A and B are not relevant to this weakness, and choice C is incorrect as non-controlling interest (NCI) is computed using the fair market values of the subsidiary's net assets in the fair value enterprise method.
Learning Objectives
- Identify the distinctions between different consolidation methods, including the fair value enterprise method and the parent company method.
- Understand the treatment of negative goodwill and acquisition differentials in consolidated financial statements.