Question 1

The two methods of accounting for an investment in a subsidiary are the _______________________ method and the ______________________________ method.

Accepted Answer

equity, cost

Question 2

The conceptually correct method of accounting for an investment in a subsidiary is the ___________________________________________________ method.

Accepted Answer

equity

Question 3

A parent that uses the accrual basis for income tax-reporting purposes will pay U.S. income taxes on a subsidiary's earnings when the subsidiary ________________________________________.

Accepted Answer

declares dividends

Question 4

Under the equity method of accounting, the parent's investment income is appropriately described in the parent's income statement using the account ________________________________________.

Accepted Answer

The answer of Under the equity method of accounting, the...

Question 5

Under the cost method of accounting, the parent's investment income is appropriately described in the parent's income statement using the account ________________________________________.

Accepted Answer

The answer of Under the cost method of accounting, the...

Question 6

Under the equity method, all dividends declared by the subsidiary are treated as a(n) ________________________________________ of the parent's investment.

Accepted Answer

The answer of Under the equity method, all dividends declared...

Question 7

The equity method reflects the _________________________________________ of the subsidiary.

Accepted Answer

The answer of The equity method reflects the _________________________________________ of...

Question 8

The difference between the carrying value of the investment under the equity method and under the cost method pertains to the subsidiary's _______________________________________.

Accepted Answer

The answer of The difference between the carrying value of...

Question 9

A company that has no operations of its own-only investments in other companies that have operations-is called a(n) ________________________________.

Accepted Answer

The answer of A company that has no operations of...

Question 10

Financial statements of the parent that are presented in certain circumstances in notes to the consolidated statements are called ___________________________ statements.

Accepted Answer

The answer of Financial statements of the parent that are...

Question 11

To use the equity method of accounting for an unconsolidated subsidiary, the parent must have __________________________________.

Accepted Answer

The answer of To use the equity method of accounting...

Question 12

The equity method is sometimes referred to as a(n) __________________________.

Accepted Answer

The answer of The equity method is sometimes referred to...

Question 13

Under the equity method, a subsidiary's earnings are effectively treated as an additional capital investment by the parent.

Accepted Answer

Under the equity method, a parent company records its share of a subsidiary's earnings as an increase in the value of its investment in the subsidiary, effectively treating these earnings as an additional capital investment.

Question 14

Under the equity method, all dividends (except stock dividends) declared by the subsidiary are treated as a liquidation of the investment.

Accepted Answer

Under the equity method, dividends received from the investee are considered a return on investment and thus reduce the carrying amount of the investment on the investor's books, effectively treating them as a partial liquidation of the investment.

Question 15

Under the equity method, the declaration of dividends-not the cash payment of dividends-results in changing the carrying value of the investment.

Accepted Answer

Under the equity method, the declaration of dividends by the investee results in a decrease in the carrying value of the investment on the investor's books, as it is considered a return on the investment rather than income.

Question 16

Under the equity method, the carrying value of the investment represents the market value of the common stock holding.

Accepted Answer

Under the equity method, the carrying value of the investment is initially recorded at cost and subsequently adjusted for the investor's share of the investee's profits or losses and dividends received, not the market value of the common stock holding.

Question 17

When a subsidiary declares a dividend that is more than the subsidiary's net income for that year, the consolidated net income will not equal the parent's net income under the equity method.

Accepted Answer

The answer of When a subsidiary declares a dividend that...

Question 18

When the parent is not obligated to invest additional funds in a subsidiary that is reporting losses, the parent stops applying the equity method when the subsidiary's retained earnings becomes negative.

Accepted Answer

The parent continues to apply the equity method even if the subsidiary's retained earnings become negative, until the parent's investment is reduced to zero. The method is not discontinued solely due to negative retained earnings in the subsidiary.

Question 19

When the parent is not obligated to invest additional funds in a subsidiary that is reporting losses, the parent stops applying the equity method when the subsidiary's equity becomes negative.

Accepted Answer

The equity method is applied only as long as the parent's investment in the subsidiary has a positive value. If the subsidiary's equity becomes negative and the parent is not obligated to cover the losses, the parent ceases to apply the equity method.

Question 20

When the parent is obligated to invest additional funds in a subsidiary that is reporting losses, the parent stops applying the equity method when the subsidiary's retained earnings becomes negative.

Accepted Answer

The parent continues to apply the equity method even if the subsidiary's retained earnings become negative. The parent's share of losses would reduce the carrying amount of the investment to zero, and any further losses would generally be recognized only to the extent that the parent has a legal or constructive obligation to cover these losses.

Quiz 2: Wholly Owned Subsidiaries: Postcreation Periods

The two methods of accounting for an investment in a subsidiary are the _ method and the ________ method.