A Comparison of Consolidated Financial Statements under the Economic Unit
Concept and the Parent Company Concept
Project Scenario:
On January 1, 2004, Pinter purchased a controlling interest in Strong, Inc., for $800,000. At that date Strong's book value was $600,000. Strong's assets and liabilities approximated their market values except for the following items:
Market Value Book Value
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,000 $100,000
Building (six-year remaining life) . . . . . . . . . . . 170,000 140,000
Equipment (three-year remaining life) . . . . . . 370,000 325,000
Pinter accounts for its investment in Strong using the equity method. Strong declared a $25,000 dividend late in 2004. The dividend had not been paid as of December 31, 2004.
Note that Pinter reflects an 80 percent ownership of Strong.
Instructions:
Prepare a written summary that compares and explains the differences between the economic unit concept and parent company concept consolidated figures at 80 percent ownership.
Describe the effects on the consolidated balances when 100 percent ownership exists. Indicate which concept you believe should be used in financial reporting and why.