If the parent company uses the equity method to record its investment in a subsidiary in its internal accounting records, which of the following statements is FALSE?
A) The parent's net income equals consolidated net income.
B) The parent's retained earnings will be equal to consolidated retained earnings.
C) Only the parent's share of the subsidiary's income, dividends and amortization of acquisition differential are recorded in the investor's records.
D) The parent's net income equals consolidated net income attributable to the shareholders of the parent.

Question

Quizplus · Accepted Answer

While the equity method allows the parent to record its share of the subsidiary's income, dividends, and amortization of acquisition differential, it does not automatically mean that the parent's net income equals consolidated net income. Consolidated net income represents the combined earnings of the parent and the subsidiary, and it includes any intra-group transactions (such as intercompany sales) that may affect the consolidated results differently than they affect the parent's results alone. Therefore, the consolidated net income may differ from the parent's net income, even if the equity method is used. However, the parent's net income will equal consolidated net income attributable to the shareholders of the parent, which represents the portion of consolidated net income that belongs to the parent's shareholders.

If the Parent Company Uses the Equity Method to Record