Page 578 - Accounting Principles (A Business Perspective)

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• The initial investment is debited to an Investment in (Company Name) account. The purchasing company's
share of the investee's income is debited to the investment account, and the purchaser's share of the investee's
losses and dividends is credited to the investment account as they are reported by the investee.

• A corporation that owns more than 50 per cent of the outstanding voting common stock of another
corporation is called the parent company.
• The corporation acquired and controlled by the parent company is known as the subsidiary company.
• A parent company and its subsidiaries maintain their own accounting records and prepare their own
financial statements, but the parent company must also prepare consolidated financial statements. The
consolidated financial statements consolidate the financial results of the parent and subsidiaries as a single

enterprise.
• Consolidated financial statements must be prepared (1) when one company owns more than 50 per cent of
the outstanding voting stock of another company and (2) unless control is likely to be temporary or if it does
not rest with the majority owner.
• In preparing consolidated financial statements, the effects of intercompany transactions must be
eliminated by making elimination entries. Elimination entries are made only on a consolidated statement work
sheet, not in the accounting records of either company.
• One elimination entry offsets the parent company's subsidiary investment account against the stockholders'
equity accounts of the subsidiary. Intercompany receivables and payables also must be eliminated.

• A consolidated financial statements work sheet is an informal record in which elimination entries are made
for the purpose of showing account balances as if the parent and its subsidiaries were a single economic
enterprise.
• A consolidated balance sheet work sheet is prepared at the time of acquisition. The first two columns of the
work sheet show assets, liabilities, and stockholders' equity of the parent and subsidiary as they appear on each
corporation's individual balance sheet. The next pair of columns shows the eliminations. The final column
shows the amounts that appear on the consolidated balance sheet.

• A consolidated work sheet is prepared at various dates after acquisition. The first two columns show the
income statements, statements of retained earnings, and balance sheets of the parent and subsidiary. The next
pair of columns shows the eliminations. The final column shows the amounts that appear in the consolidated
financial statements.
• Consolidated financial statements are of primary importance to stockholders, managers, and directors of
the parent company. On the other hand, consolidated financial statements are of limited use to the creditors
and minority stockholders of the subsidiary.
Dividend per share of common stock
• Dividend yield oncommon stock ratio=
Current market price per share
• This ratio helps investors to compare stocks.
Dividend per share of commonstock
• Payout ratiooncommonstock=
Earnings per shareEPS
• This ratio indicates whether a company pays out a large percentage of earnings as dividends or reinvests
most of its earnings.

Accounting Principles: A Business Perspective 579 A Global Text