Question 1

Under the equity method of accounting, a parent company credits the Intercompany Investment Income ledger account for dividends declared by the subsidiary.

Accepted Answer

Under the equity method of accounting, dividends declared by the subsidiary reduce the carrying amount of the investment on the parent company's books, rather than being recognized as income.

Question 2

Under the equity method of accounting, a parent company's journal entry to record a dividend declared by the subsidiary includes a debit to the Retained Earnings of Subsidiary ledger account and a credit to the Dividends Revenue ledger account.

Accepted Answer

Under the equity method of accounting, a dividend declared by the subsidiary results in a debit to the Cash (or Dividends Receivable) account and a credit to the Investment in Subsidiary account, reflecting a reduction in the carrying amount of the investment. There is no impact on the Retained Earnings of Subsidiary or Dividends Revenue accounts in the parent company's books for this transaction.

Question 3

Proponents of the equity method of accounting assert that dividends declared by a subsidiary constitute revenue to the parent company.

Accepted Answer

Under the equity method of accounting, dividends declared by a subsidiary are not recognized as revenue by the parent company. Instead, they are treated as a reduction in the carrying amount of the investment in the subsidiary.

Question 4

A wholly owned subsidiary credits the Dividends Payable ledger account when its board of directors declares a dividend.

Accepted Answer

The answer of A wholly owned subsidiary credits the Dividends...

Question 5

Under the equity method of accounting, the parent company credits the Intercompany Investment Income ledger account for dividends declared by the subsidiary.

Accepted Answer

Under the equity method of accounting, dividends declared by the subsidiary reduce the carrying amount of the investment on the parent company's books, rather than being recognized as income.

Question 6

Under the equity method of accounting, the parent company debits the Intercompany Investment Income ledger account for the depreciation and amortization of differences between the current fair values and carrying amounts of a subsidiary's identifiable net assets on the date of the business combination.

Accepted Answer

Under the equity method, the parent company recognizes its share of the subsidiary's net income or loss, which includes depreciation and amortization expenses.

Question 7

The depreciation and amortization of differences between current fair values and carrying amounts of a subsidiary's identifiable net assets is included in consolidated financial statements by means of a working paper elimination.

Accepted Answer

In consolidated financial statements, adjustments for differences between the fair value and carrying amounts of a subsidiary's net assets are made through working paper eliminations to reflect the accurate value of the subsidiary's assets and liabilities.

Question 8

In a closing entry for a parent company that has a subsidiary acquired several years ago, there may be either a debit or a credit to the Retained Earnings of Subsidiary ledger account.

Accepted Answer

In consolidation accounting, adjustments to the Retained Earnings of a subsidiary may be necessary to eliminate intercompany transactions or to adjust the subsidiary's retained earnings to fair value at the acquisition date. These adjustments can result in either a debit or a credit to the Retained Earnings of Subsidiary ledger account.

Question 9

Goodwill attributable to a business combination involving a partially owned subsidiary is amortized by means of a working paper elimination.

Accepted Answer

Goodwill is not amortized but is instead tested annually for impairment. Goodwill arises from a business combination and is the excess of the purchase consideration over the fair value of identifiable net assets acquired.

Question 10

A parent company that uses the cost method of accounting for the operations of a subsidiary prepares no journal entries to reflect the subsidiary's net income or loss for an accounting period.

Accepted Answer

Under the cost method, the investment in the subsidiary is recorded at cost and is not adjusted for the subsidiary's net income or loss. Instead, dividends received from the subsidiary are typically the only transactions affecting the carrying amount of the investment.

Question 11

Use of the equity method of accounting facilitates a parent company's issuances of unconsolidated financial statements to the Securities and Exchange Commission if the SEC requires such statements.

Accepted Answer

The equity method allows a parent company to report its share of an investee's profits or losses, which can be useful for preparing unconsolidated financial statements if required by the SEC.

Question 12

Dividends declared by a subsidiary subsequent to the date of a business combination are displayed in a consolidated statement of retained earnings.

Accepted Answer

Dividends declared by a subsidiary subsequent to the date of a business combination are not displayed in the consolidated statement of retained earnings because they are considered intercompany transactions that are eliminated in consolidation.

Question 13

The equity method of accounting for a subsidiary's operations is similar to home office accounting for a branch's operations.

Accepted Answer

The equity method of accounting for a subsidiary's operations is similar to home office accounting for a branch's operations because both methods involve the parent company recording its share of the subsidiary's or branch's net income or loss on its own income statement.

Question 14

On October 1, 2006, Poon Corporation acquired for cash all the outstanding common stock of Soong Company, which was not liquidated. Consolidated net income for the fiscal year ended December 31, 2006, includes net income of:

Accepted Answer

Poon Corporation's consolidated net income includes its own net income for the entire year and Soong Company's net income from the acquisition date (October 1, 2006) to the end of the fiscal year (December 31, 2006).

Question 15

The method of accounting for a subsidiary's operations that emphasizes the legal form of the parent company-subsidiary relationship is:

Accepted Answer

The cost method of accounting for a subsidiary's operations emphasizes the legal form of the parent company-subsidiary relationship. Under this method, the investment is recorded at cost and adjusted for dividends received, without recognizing the subsidiary's income or losses until dividends are declared.

Question 16

The format of a parent company's journal entry (explanation omitted), under the equity method of accounting, to adjust a wholly owned subsidiary's net income or loss for depreciation and amortization of differences between date-of-combination current fair values and carrying amounts of the subsidiary's identifiable net assets, is:

Accepted Answer

The answer of The format of a parent company's journal...

Question 17

A parent company that uses the equity method of accounting for a 90%-owned subsidiary prepared the following journal entry:
 A possible explanation for the foregoing journal entry is:

Accepted Answer

The answer of A parent company that uses the equity...

Question 18

During the fiscal year ended October 31, 2006, a wholly owned subsidiary of Prescott Company had an adjusted net income of $200,000 and declared dividends of $80,000. In its own operations (exclusive of its equity-method journal entries for the subsidiary), Prescott had total revenue of $800,000 and total costs and expenses of $600,000. In an October 31, 2006, closing entry, Prescott should:

Accepted Answer

The answer of During the fiscal year ended October 31,...

Question 19

The Retained Earnings of Subsidiary ledger account is:

Accepted Answer

The answer of The Retained Earnings of Subsidiary ledger account...

Question 20

Under the equity method of accounting, depreciation and amortization of the date-of-business-combination differences between current fair values and carrying amounts of a subsidiary's identifiable net assets is debited in a journal entry to the:

Accepted Answer

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

Quiz 7: Consolidated Financial Statements: Subsequent to Date of Business Combination