Consolidation, discontinued ops, liquidation basis, accounting changes

Answer A. Under ASC 250, a voluntary change in an accounting principle (for example, changing the inventory cost‑flow assumption from FIFO to weighted average) is applied retrospectively to all prior periods presented unless retrospective application is impracticable. Because management has complete records and the prior FIFO application was not an error, Year 1 should be restated and the nature, reason, and quantitative effects of the change disclosed.

Why not B: Tempting because students sometimes confuse changes in accounting principle with changes in estimate, which are treated prospectively. This is incorrect here because switching the inventory cost‑flow assumption is a change in accounting principle, not an estimate, so the default is retrospective application when practicable.

Why not C: Both error corrections and voluntary principle changes involve restatement-type adjustments, so this choice is attractive. It is wrong because a correction of an error requires that the prior accounting was incorrect (e.g., a misapplication); here FIFO was not an error, management voluntarily changed methods.

Why not D: This mirrors an administratively simple 'catch‑up' approach and may resemble treatment when retrospective application is impracticable. It is incorrect because when retrospective application is practicable the change must be reflected by restating prior periods; if retrospective application is impracticable, the cumulative effect is generally adjusted to opening retained earnings of the earliest period practicable, not recognized as a current‑year catch‑up to net income.

Answer C. Liquidation basis is required when liquidation becomes imminent. Here, the entity's governing documents and state law required shareholder approval, so the board alone did not have the final authority to make liquidation imminent. Because formal shareholder approval occurred on January 8, 20X2, Atlas would keep its December 31, 20X1 financial statements on the normal basis of accounting and disclose the subsequent event as appropriate, then adopt liquidation basis starting January 8, 20X2.

Why not A: Tempting because board action signals management commitment, but wrong here because the board lacked unilateral authority, shareholder approval was required under the charter and state law, so liquidation was not yet imminent at year-end.

Why not B: Attractive because 72% exceeds common approval thresholds, but the letters were explicitly nonbinding and formal shareholder approval had not occurred; GAAP looks to approval by the parties with legal authority, not informal indications of likely support.

Why not D: Plausible for candidates equating liquidation with asset sales, but incorrect because liquidation basis begins when liquidation is imminent (i.e., authorized and probable), not only when sales or wind-down activities physically commence.

Answer D. Under ASC 810, a parent with a majority of the voting interests ordinarily has a controlling financial interest and must consolidate the subsidiary. The minority's unanimous‑approval veto over extraordinary transactions are protective rights and do not, by themselves, negate the parent's power to direct the activities that most significantly affect the subsidiary's economic performance, particularly where P appoints the majority of the board and directs operations. Therefore, P should consolidate S and present the noncontrolling interest as a component of equity on the consolidated balance sheet.

Why not A: This lures candidates who conflate protective rights with creditor‑like claims. It is incorrect because noncontrolling interest represents an equity ownership interest in the subsidiary and must be presented as a component of equity, not as a liability.

Why not B: This is tempting because a unanimous‑approval veto sounds like it removes control. It is incorrect because GAAP distinguishes protective rights (vetoes over extraordinary matters) from substantive control; protective vetoes do not prevent consolidation when the parent otherwise directs the activities that drive the subsidiary's economic performance.

Why not C: This distractor appeals to candidates who think disclosures can substitute for consolidation. It is wrong because consolidated financial statements are required for a parent with a controlling financial interest; note disclosures cannot replace the required consolidated statements (the parent may present separate financial statements in addition to, but not instead of, required consolidated statements).

Answer A. Under ASC 810 a partial sale that does not result in loss of control is accounted for as an equity transaction, consolidated net income does not include a gain or loss. The cumulative foreign currency translation adjustment is not reclassified into earnings on a partial disposal that retains control; instead the AOCI balance is reallocated within equity between the controlling and noncontrolling interests.

Why not B: This is tempting because selling to an outside party seems like a realization event, but reclassification of the cumulative translation adjustment to earnings occurs only when control is lost. Because ParentCo retains control, the CTA stays in AOCI and is not recognized in net income.

Why not C: This distractor assumes a proportional realization of OCI on a partial sale, but U.S. GAAP treats a partial disposal that retains control as an equity transaction, no portion of OCI is reclassified to profit or loss for the percentage sold.

Why not D: Although selling an interest to a third party might appear to generate a realized gain, when control is retained the sale is treated as a transaction between owners and recorded in equity; consolidated net income should not reflect a gain or loss on such a partial disposal.

Answer C. Revising an asset's useful life based on new usage data or projections is a change in accounting estimate under U.S. GAAP. Estimate changes are applied prospectively: allocate the book value at the date of change (1,000,000 − 200,000 = 800,000) over the revised remaining life of 4 years, giving Year 3 depreciation of 800,000 ÷ 4 = $200,000. Disclose the nature and effect if the change is material.

Why not A: Tempting because restating to a new life improves comparability, and the revised life affects prior-period amounts. It fails because a revised useful life arising from new information is an estimate change, not a change in accounting principle; GAAP requires prospective application, not retrospective restatement.

Why not B: This distractor appeals to candidates who view the original life as 'wrong' and therefore an error. It fails because error correction applies only when prior amounts resulted from a misapplication of GAAP, fraud, or a mathematical mistake; an estimate that was reasonable at the time is updated prospectively when new information becomes available.

Why not D: Some candidates believe all estimate changes should be restated for comparability. That reasoning fails under U.S. GAAP: estimate changes are applied prospectively because prior estimates were reasonable given information then available, and retrospective restatement would inappropriately rely on hindsight.