Final answer:
The question pertains to the journal entries a parent company would make when acquiring another company, which can be for cash or for issuing parent common stock. The acquisition for cash is recorded by debiting the investment in the subsidiary and crediting cash, while acquisition through stock involves debiting the investment in the subsidiary and crediting common stock and additional paid-in capital.
Step-by-step explanation:
The questions posed relate to the accounting process of a parent company recording the acquisition of another entity. When a parent company acquires another company, the transaction can be settled in cash, issuance of its own stock, or other methods. The journal entries (JEs) would depend on the mode of settlement. Here are the general journal entries for both scenarios:
- Acquisition for cash: This entry would debit the investment in the subsidiary account and credit cash or bank account, signifying an outflow of cash from the parent company to acquire the subsidiary.
- Acquisition for parent common stock: In this case, the investment in the subsidiary would be debited as well, but instead of cash, the credit entry would be to the company's common stock and possibly additional paid-in capital, if the fair value (FV) of the stock issued exceeds the par value.
These entries are crucial in the consolidation process where the parent company combines its financial statements with those of its subsidiary.