Both consolidation and equity method accounting assume a dollar earned by a subsidiary is equivalent to a dollar earned for a parent, even if not received in cash. The limitations of this assumption of dollar-for-dollar equivalence include which of the following?

I. Dividends restricted by law and loan covenants
II. Risks due to political and economic factors
III. Tax liabilities from remittance of earnings
IV. Minority interests that limit parent's discretion

Question

Both consolidation and equity method accounting assume a dollar earned by a subsidiary is equivalent to a dollar earned for a parent, even if not received in cash. The limitations of this assumption of dollar-for-dollar equivalence include which of the following?

I. Dividends restricted by law and loan covenants
II. Risks due to political and economic factors
III. Tax liabilities from remittance of earnings
IV. Minority interests that limit parent's discretion

Quizplus · Accepted Answer

All of the options listed are limitations of the assumption of dollar-for-dollar equivalence in both consolidation and equity method accounting. Dividends restricted by law and loan covenants can prevent the subsidiary from distributing earnings to the parent. Risks due to political and economic factors can impact the value of the subsidiary's earnings in relation to the parent's currency or overall financial stability. Tax liabilities from remittance of earnings can reduce the value of earnings received by the parent. Minority interests can limit the parent's control over the subsidiary's earnings and decision-making.

Both Consolidation and Equity Method Accounting Assume a Dollar Earned