Question 1

The parent company records its share of a subsidiary's income by:

Accepted Answer

Under the cost method, the parent company does not record its share of the subsidiary's income. Under the partial equity method, the parent company debits Investment in S Company and credits Equity in Subsidiary Income.

Question 2

Under the cost method, the investment account is reduced when:

Accepted Answer

Under the cost method, the investment account is reduced for a liquidating dividend, which is a return of capital to the investor, rather than from the subsidiary's earnings.

Question 3

An investor adjusts the investment account for the amortization of any difference between cost and book value under the:

Accepted Answer

Under the complete equity method, the investor adjusts the investment account for the amortization of any difference between the cost and the book value of the investee's net assets.

Question 4

P Company purchased 90% of the outstanding common stock of S Company on January 1, 2013 . S Company's stockholders' equity at various dates was:  The workpaper entry to establish reciprocity under the cost method in the preparation of a consolidated statements workpaper on December 31, 2017 should include a credit to P Company's retained earnings of:

Accepted Answer

The answer of P Company purchased 90% of the outstanding...

Question 5

Under the partial equity method, the entry to eliminate subsidiary income and dividends includes a debit to:

Accepted Answer

Under the partial equity method, the entry to eliminate subsidiary income includes a debit to Equity in Subsidiary Income. This adjustment is made to avoid double counting the income from the subsidiary that has already been recognized.

Question 6

Prime Industries acquired a 70 percent interest in Suburbia Company by purchasing 14,000 of its 20,000 outstanding shares of common stock at book value of $210,000 on January 1, 2016. Suburbia reported net income in 2016 of $90,000 and in 2017 of $120,000 earned evenly throughout the respective years. Prime received $24,000 dividends from Suburbia in 2016 and $36,000 in 2017. Prime uses the equity method to record its investment. Prime should record investment income from Suburbia during 2017 of:

Accepted Answer

Under the equity method, Prime would recognize its share of Suburbia's net income as investment income. Prime owns 70% of Suburbia, so for 2017, it would recognize 70% of Suburbia's $120,000 net income, which is $84,000. Dividends received reduce the carrying amount of the investment and are not recognized as income under this method.

Question 7

In the preparation of a consolidated statement of cash flows using the indirect method of presenting cash flows from operating activities, the amount of the noncontrolling interest in consolidated income is:

Accepted Answer

The noncontrolling interest in consolidated income is combined with the controlling interest in consolidated net income when preparing a consolidated statement of cash flows using the indirect method. This approach ensures that the statement reflects the total income attributable to both the parent company and the noncontrolling interests.

Question 8

On October 1, 2017, Perma Company acquired for cash all of the voting common stock of Street Company. The purchase price of Street's stock equaled the book value and fair value of Street's net assets. The separate net income for each company, excluding Perma's share of income from Street was as follows:  During September, Street paid $150,000 in dividends to its stockholders. For the year ended December 31, 2017, Perma issued parent company only financial statements. These statements are not considered those of the primary reporting entity. Under the partial equity method, what is the amount of net income reported in Perma's income statement?

Accepted Answer

The answer of On October 1, 2017, Perma Company acquired...

Question 9

Under the cost method, the workpaper entry to establish reciprocity:

Accepted Answer

The answer of Under the cost method, the workpaper entry...

Question 10

Park Company acquired a 90% interest in Southwestern Company on December 31, 2016, for $320,000. During 2017 Southwestern had a net income of $22,000 and paid a cash dividend of $7,000. Applying the cost method would give a debit balance in the Investment in Stock of Southwestern Company account at the end of 2017 of:

Accepted Answer

Under the cost method, the investment account remains at the original cost of acquisition, which is $320,000. The net income and dividends of the subsidiary do not affect the investment account balance.

Question 11

Consolidated net income for a parent company and its partially owned subsidiary is best defined as the parent company's:

Accepted Answer

The answer of Consolidated net income for a parent company...

Question 12

A parent company uses the partial equity method to account for an investment in common stock of its subsidiary. A portion of the dividends received this year were in excess of the parent company's share of the subsidiary's earnings subsequent to the date of the investment. The amount of dividend income that should be reported in the parent company's separate income statement should be:

Accepted Answer

Under the partial equity method, dividends received in excess of the parent's share of subsidiary's earnings are not recognized as dividend income in the parent's income statement. Instead, they reduce the carrying amount of the investment. Therefore, no dividend income should be reported.

Question 13

A parent company received dividends in excess of the parent company's share of the subsidiary's earnings subsequent to the date of the investment. How will the parent company's investment account be affected by those dividends under each of the following accounting methods?

Accepted Answer

Under the Cost Method, dividends received in excess of the parent's share of the subsidiary's earnings reduce the investment account. Similarly, under the Partial Equity Method, such excess dividends also decrease the investment account as they are considered a return of capital.

Question 14

Pine, Inc. owns 40% of Supra Corporation. During the year, Supra had net earnings of $200,000 and paid dividends of $50,000. Masters used the cost method of accounting. What effect would this have on the investment account, net earnings, and retained earnings, respectively?

Accepted Answer

Using the cost method, Pine, Inc. would not adjust the investment account for its share of Supra's earnings, leading to an understatement. Dividends received would be recorded as income, not affecting net earnings or retained earnings, leading to an understatement of both.

Question 15

In years subsequent to the year of acquisition, an entry to establish reciprocity is made under the:

Accepted Answer

The answer of In years subsequent to the year of...

Question 16

On the consolidated statement of cash flows, the parent's acquisition of additional shares of the subsidiary's stock directly from the subsidiary is reported as:

Accepted Answer

The acquisition of additional shares of a subsidiary by the parent company directly from the subsidiary does not appear on the consolidated statement of cash flows because intercompany transactions are eliminated in consolidation.

Question 17

Prime Industries acquired a 70 percent interest in Suburbia Company by purchasing 14,000 of its 20,000 outstanding shares of common stock at book value of $210,000 on January 1, 2016. Suburbia reported net income in 2016 of $90,000 and in 2017 of $120,000 earned evenly throughout the respective years. Prime received $24,000 dividends from Suburbia in 2016 and $36,000 in 2017. Prime uses the equity method to record its investment. The balance of Prime's Investment in Suburbia account at December 31, 2017 is:

Accepted Answer

Under the equity method, the investment account is adjusted for the investor's share of the investee's net income and dividends received. Prime's share of Suburbia's net income is 70%. For 2016, it's 70% of $90,000 = $63,000, and for 2017, it's 70% of $120,000 = $84,000. Dividends received reduce the investment account. The initial investment was $210,000. Adjusting for 2016: $210,000 + $63,000 - $24,000 = $249,000. Adjusting for 2017: $249,000 + $84,000 - $36,000 = $297,000.

Question 18

P Company purchased 80% of the outstanding common stock of S Company on May 1, 2017, for a cash payment of $1,272,000. S Company's December 31, 2016 balance sheet reported common stock of $800,000 and retained earnings of $540,000. During the calendar year 2017, S Company earned $840,000 evenly throughout the year and declared a dividend of $300,000 on November 1. What is the amount needed to establish reciprocity under the cost method in the preparation of a consolidated workpaper on December 31, 2018?

Accepted Answer

The reciprocity amount is the difference between the book value of the subsidiary's net assets and the cost of the investment. The book value of the subsidiary's net assets is $800,000 + $540,000 + $840,000 - $300,000 = $1,880,000. The cost of the investment is $1,272,000. The difference is $1,880,000 - $1,272,000 = $208,000.

Question 19

Pall, Inc, owns 40% of the outstanding stock of Sibil Company. During 2017, Pall received a $4,000 cash dividend from Sibil. What effect did this dividend have on Pall's 2017 financial statements?

Accepted Answer

When Pall, Inc. receives a dividend from Sibil Company, it reduces the carrying amount of the investment in Sibil on Pall's balance sheet, as dividends are considered a return on investment. This does not affect income or total assets.

Question 20

In the preparation of a consolidated statements workpaper, dividend income recognized by a parent company for dividends distributed by its subsidiary is:

Accepted Answer

In the preparation of consolidated financial statements, dividend income recognized by a parent company from dividends distributed by its subsidiary is eliminated. This is because consolidated financial statements present the financial position and results of operations of a parent and its subsidiaries as if the group were a single entity. Dividends paid by a subsidiary to its parent are internal transactions within the group and thus are eliminated in consolidation to avoid double counting of income.

Quiz 4: Consolidated Financial Statements After Acquisition