Question 1

For partially owned subsidiaries, part of the rationale of full consolidation is that the parent controls the subsidiary and therefore should include (a) all the assets and liabilities under its control and (b) all income statement activities resulting from its control.

Accepted Answer

Full consolidation reflects the parent company's control over the subsidiary by including all assets, liabilities, and income statement activities of the subsidiary in the parent's financial statements, regardless of the percentage of ownership. This approach is based on the principle that control implies the ability to govern financial and operating policies, thereby obtaining benefits from the subsidiary's activities.

Question 2

The rationale underlying the parent company concept is that the reporting entity does not change as a result of the consolidation process.

Accepted Answer

The parent company concept holds that the reporting entity remains the parent company even after consolidation, emphasizing that the consolidation process does not alter the identity of the reporting entity.

Question 3

Under the parent company concept, the interest of the noncontrolling shareholders is considered to be an equity interest of the consolidated reporting entity.

Accepted Answer

The answer of Under the parent company concept, the interest...

Question 4

The rationale of the economic unit concept is that the reporting entity does change as a result of the consolidation process.

Accepted Answer

The economic unit concept states that the reporting entity does not change as a result of the consolidation process.

Question 5

Under the economic unit concept, the interest of the noncontrolling shareholders is considered to be an equity interest of the consolidated reporting entity.

Accepted Answer

The economic unit concept treats the interest of the noncontrolling shareholders as an equity interest in the consolidated entity, reflecting the view that all shareholders, regardless of their controlling interest, are part of the same economic entity.

Question 6

Both the parent company concept and the economic unit concept are full consolidation approaches.

Accepted Answer

Both the parent company concept and the economic unit concept are considered full consolidation approaches because they involve combining the financial statements of a parent company and its subsidiaries into a single set of financial statements, as if they were a single economic entity.

Question 7

Under current GAAP, both the parent company concept and the economic unit concept are allowed.

Accepted Answer

Under current GAAP (Generally Accepted Accounting Principles), both the parent company concept and the economic unit concept are allowed approaches for consolidating financial statements of a parent company and its subsidiaries.

Question 8

Under current GAAP, only the parent company concept is allowed.

Accepted Answer

Under current GAAP (Generally Accepted Accounting Principles), both the parent company concept and the entity concept are allowed for reporting consolidated financial statements. The parent company concept focuses on the interests of the parent company's shareholders, while the entity concept treats the consolidated group as a single economic entity, including both the parent and its subsidiaries.

Question 9

Under the parent company concept, the NCI in the subsidiary's net income is presented as a deduction in arriving at consolidated net income.

Accepted Answer

Under the parent company concept, the non-controlling interest (NCI) in the subsidiary's net income is deducted from the consolidated net income to reflect the portion of income attributable to minority shareholders.

Question 10

Under the economic unit concept, the NCI in the subsidiary's net income is presented as a deduction in arriving at consolidated net income.

Accepted Answer

Under the economic unit concept, the NCI (Non-Controlling Interest) in the subsidiary's net income is not presented as a deduction in arriving at consolidated net income. Instead, it is presented as a separate line item that allocates a portion of the net income to the non-controlling interests, after the calculation of the consolidated net income.

Question 11

Under the parent company concept, the NCI in the subsidiary's net assets is presented as part of consolidated stockholders' equity.

Accepted Answer

The answer of Under the parent company concept, the NCI...

Question 12

Under the economic unit concept, the NCI in the subsidiary's net assets is presented as part of consolidated stockholders' equity.

Accepted Answer

Under the economic unit concept, Non-Controlling Interest (NCI) in the subsidiary's net assets is indeed presented as part of consolidated stockholders' equity, reflecting the view that NCI is an integral part of the equity of the consolidated entity.

Question 13

If a subsidiary is not consolidated, the parent can arbitrarily choose between either the equity method or the cost method.

Accepted Answer

The choice between the equity method and the cost method for accounting for an investment in a subsidiary that is not consolidated is not arbitrary. It depends on the level of influence or control the parent has over the subsidiary, as well as accounting standards and regulations.

Question 14

If a subsidiary is not consolidated, the equity method can be used only if significant influence exists.

Accepted Answer

The equity method of accounting is used when an investing company has significant influence over the investee, typically indicated by owning 20% to 50% of the investee's equity. If a subsidiary is not consolidated, usually because the parent does not have a controlling interest, and significant influence exists, the equity method can indeed be applied.

Question 15

A foreign subsidiary is not consolidated because the foreign government has imposed dividend payment restrictions. The cost method would usually be used instead of the equity method in accounting for the investment in the subsidiary.

Accepted Answer

The cost method is used when there are restrictions on the repatriation of earnings, which is the case in this scenario.

Question 16

An 80% owned subsidiary is not consolidated because control has been lost. The cost method cannot be used to account for the investment in the subsidiary.

Accepted Answer

Even if control is lost, the cost method can still be used to account for the investment in the subsidiary, especially if the equity method or consolidation is not appropriate or possible.

Question 17

An 80% owned subsidiary is not consolidated because control has been lost. The cost method cannot be used to account for the investment in the subsidiary if the subsidiary's common stock has a readily determinable fair value.

Accepted Answer

The cost method cannot be used to account for the investment in the subsidiary if the subsidiary's common stock has a readily determinable fair value because the fair value method must be used in this case.

Question 18

An 80% owned subsidiary is not consolidated because control has been lost. The cost method cannot be used to account for the investment in the subsidiary if the parent has significant influence.

Accepted Answer

Even if control is lost, if the parent has significant influence over the subsidiary, the equity method, not the cost method, is typically used to account for the investment in the subsidiary.

Question 19

The equity method can be used in lieu of consolidation.

Accepted Answer

The answer of The equity method can be used in...

Question 20

Having certain financial arrangements with another entity that result in control is having effective legal control.

Accepted Answer

Having certain financial arrangements with another entity that result in control is referred to as having effective control, but it does not necessarily equate to having legal control. Legal control typically involves ownership rights or specific legal authority.

Quiz 3: Partially Owned Created Subsidiaries & Variable Interest Entities