One weakness associated with the Entity Theory is that:
A) it is inconsistent with the Historical Cost Principle.
B) Non-Controlling Interest is computed using the fair market values of the subsidiary's net assets.
C) Non-Controlling interest is computed using the book values of the subsidiary's net assets.
D) the presumed acquisition cost may be unrealistic when the parent purchases significantly less than 100% of the subsidiary's voting shares, or voting control is achieved incrementally.

Question

Quizplus · Accepted Answer

The Entity Theory assumes that the parent company has 100% control over the subsidiary, which may not be the case when the parent acquires less than 100% of the voting shares or achieves voting control incrementally. Therefore, the presumed acquisition cost may not be realistic, and adjustments may be needed to properly reflect the subsidiary's value and the non-controlling interest. Choices A and B are not relevant to the Entity Theory, and choice C is incorrect as the Non-Controlling Interest is computed using fair market values, not book values.

One Weakness Associated with the Entity Theory Is That