The pre-acquisition entry is necessary to:
A) avoid overstating the equity and net assets of the group.
B) avoid understating the equity and net assets of the group.
C) avoid overstating the equity and net assets of the parent.
D) record the 'shares in subsidiary' account in the parent's records.

Question

Quizplus · Accepted Answer

The pre-acquisition entry is necessary to avoid overstating the equity and net assets of the group. Without this entry, the parent's equity would be overstated by the value of the subsidiary's equity that existed before the acquisition. This is because the parent is only entitled to the equity that it acquired in the subsidiary, not the equity that existed before the acquisition. By eliminating the pre-acquisition equity of the subsidiary, the equity and net assets of the group are properly stated.

The Pre-Acquisition Entry Is Necessary To