Under the Parent Company Theory, which of the following statements pertaining to Consolidated Financial Statements is TRUE?
A) The Consolidated Balance Sheet is prepared by adding the carrying amounts of both the Parent and its subsidiary.
B) The Consolidated Balance Sheet is prepared by adding the carrying amounts of both the Parent and its subsidiary as well as the Parent's share of any acquisition differentials.
C) The Consolidated Balance Sheet is prepared by adding the fair market values of both the Parent and its subsidiary as well as the parent's share of any acquisition differentials.
D) The Consolidated Balance Sheet is prepared by adding together the fair market values of both the parent and its subsidiary.

Question

Quizplus · Accepted Answer

Under the Parent Company Theory, the Consolidated Balance Sheet is prepared by adding the carrying amounts of both the Parent and its subsidiary as well as the Parent's share of any acquisition differentials. This is because the Parent Company Theory assumes that the Parent Company controls the subsidiary, and therefore the Parent's financial statements should reflect the assets, liabilities, and equity of both the Parent and its subsidiary. The carrying amounts of the subsidiary are added, rather than the fair market values, because the theory assumes that the Parent Company has already accounted for any acquisition premiums or discounts at the time of the acquisition.

Under the Parent Company Theory, Which of the Following Statements