The effect of the pre-acquisition entry is to eliminate the asset, 'Shares in subsidiary' and replace it with the:
A) net assets of the subsidiary;
B) profit of the subsidiary;
C) equity accounts of the subsidiary;
D) cash and cash equivalents held by the subsidiary.

Question

Quizplus · Accepted Answer

The pre-acquisition entry eliminates the asset, 'Shares in subsidiary' which represents the cost of acquisition of the subsidiary. Instead, it is replaced by the net assets of the subsidiary which includes all the assets, liabilities and equity of the subsidiary as of the acquisition date. This is in accordance with the concept of acquisition accounting where the parent company acquires control of the subsidiary and consolidates its financial statements with its own.

The Effect of the Pre-Acquisition Entry Is to Eliminate the Asset