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.

Question

Quizplus · 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.

When the Parent Is Obligated to Invest Additional Funds in a Subsidiary