A parent company records an investment in its subsidiary using the equity method. Which of the following statements about consolidated net income is true?
A)Consolidated net income is higher than the net income under the equity method.
B)Consolidated net income is lower than the net income under the equity method.
C)Consolidated net income is higher than the net income under the equity method only if the subsidiary is profitable and has not paid any dividends.
D)Consolidated net income is the same as the net income under the equity method.

Question

Quizplus · Accepted Answer

Consolidated net income is the same as the net income under the equity method because, under both methods, the parent's share of the subsidiary's net income is included in the parent's income statement. The equity method records this share as an increase in the investment account and a corresponding entry in income, while consolidation combines the parent's and subsidiary's financial statements line by line. The end result on net income is the same.

A Parent Company Records an Investment in Its Subsidiary Using