Question 1

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 equity becomes negative.

Accepted Answer

The parent continues to apply the equity method even if the subsidiary's equity becomes negative, recognizing losses to the extent of the parent's interest in the subsidiary, including any long-term interests that, in substance, form part of the net investment in the subsidiary.

Question 2

When the parent has temporarily discontinued applying the equity method because of the subsidiary's substantial operating losses, the parent resumes application of the equity method when the subsidiary's retained earnings becomes positive.

Accepted Answer

The parent resumes application of the equity method not when the subsidiary's retained earnings become positive, but rather when the investee returns to profitability and the investor's share of profits equals the share of losses not recognized during the period the equity method was suspended.

Question 3

When the parent has temporarily discontinued applying the equity method because of the subsidiary's substantial operating losses, the parent resumes application of the equity method when the subsidiary's equity becomes positive.

Accepted Answer

The parent resumes the equity method when the subsidiary's financial position improves and its equity becomes positive, indicating recovery from substantial losses.

Question 4

When a parent accounts for its investment in a subsidiary using the equity method, only the subsidiary's undistributed retained earnings is added to the parent's retained earnings in the consolidation process.

Accepted Answer

In the consolidation process, the parent's investment in the subsidiary is eliminated against the subsidiary's equity (including both initial investment and undistributed retained earnings), and only the subsidiary's net income (not just undistributed retained earnings) affects the parent's retained earnings through the equity method.

Question 5

To properly calculate the return on its investment in a subsidiary, the parent must use as the denominator the carrying value produced under the equity method.

Accepted Answer

The equity method involves recognizing the parent company's share of the subsidiary's profits or losses, and the carrying value of the investment is adjusted accordingly, making it the appropriate denominator for calculating the return on investment.

Question 6

Whether the equity method or the cost method is used to account for an investment in a subsidiary, the consolidated statements are identical.

Accepted Answer

In consolidated financial statements, the specific method used for accounting for an investment (equity or cost method) does not affect the presentation because all subsidiary's assets, liabilities, revenues, and expenses are fully consolidated with those of the parent, eliminating intercompany transactions and balances.

Question 7

Under the cost method, the investment account is not reduced for dividends declared by the subsidiary.

Accepted Answer

Under the cost method, dividends received from the subsidiary are treated as a return on investment and recorded as dividend income, not as a reduction in the investment account's carrying amount.

Question 8

Under the cost method, the investment account is reduced for dividends when they are received-not when they are paid.

Accepted Answer

The answer of Under the cost method, the investment account...

Question 9

Under the cost method, the investment account is reduced for the subsidiary's cumulative reported losses that exceed its cumulative reported profits.

Accepted Answer

Under the cost method, the investment account is not adjusted for the subsidiary's profits or losses; it remains at the original cost unless there are impairments or distributions received.

Question 10

The cost method has a built-in checking feature that is useful in preparing consolidated statements.

Accepted Answer

The cost method records investments at their original cost without adjusting for changes in market value, which does not provide a built-in checking feature for preparing consolidated statements. The equity method, not the cost method, offers more insight into the investee's performance, which can be useful in consolidation.

Question 11

If a write-down has been made to the parent's investment under the cost method, the investment account can be written back up, but only to the original cost amount, if the subsidiary later becomes profitable.

Accepted Answer

Under the cost method, once a write-down has been made to an investment, it cannot be written back up in the future, even if the subsidiary becomes profitable. The write-down is considered permanent.

Question 12

If a write-down has been made to the parent's investment under the cost method, the investment account cannot be written back up to the original cost amount if the subsidiary later becomes profitable.

Accepted Answer

Under the cost method, once a write-down has been made to an investment, it cannot be reversed or written back up to the original cost amount, even if the subsidiary later becomes profitable. This is in accordance with accounting principles which generally prohibit the reversal of impairment losses on equity investments.

Question 13

The consolidated net income equals the parent's net income only if the parent accounts for its investment in the subsidiary using the cost method.

Accepted Answer

Consolidated net income includes the parent's net income and its share of the subsidiary's net income, adjusted for intercompany transactions, regardless of the accounting method used for the investment.

Question 14

When a subsidiary is reporting profits, the consolidated net income can never equal the parent's net income under the cost method.

Accepted Answer

Under the cost method, the parent company records its investment in the subsidiary at cost and recognizes income only when dividends are received. Therefore, if the subsidiary does not declare dividends, the consolidated net income can equal the parent's net income, as the subsidiary's profits would not impact the parent's income statement until dividends are declared.

Question 15

Under the cost method, the subsidiary's retained earnings is added to the parent's retained earnings in the consolidation process.

Accepted Answer

Under the cost method, the subsidiary's retained earnings are not added to the parent's retained earnings in the consolidation process. Instead, the subsidiary's retained earnings are eliminated against the parent's investment in the subsidiary.

Question 16

Under FAS 94, parent-company-only statements must be included in notes to the consolidated statements.

Accepted Answer

FAS 94 (Statement of Financial Accounting Standards No. 94) requires the elimination of parent-company-only financial statements if consolidated statements are presented, thus not requiring parent-company-only statements to be included in the notes to the consolidated statements.

Question 17

When parent-company-only statements are presented in the notes to the consolidated statements, the net income and retained earnings amounts in such statements agree with the corresponding amounts in the consolidated statements only if the equity method is used.

Accepted Answer

The equity method aligns the parent company's net income and retained earnings with the consolidated financial statements by recognizing the parent's share of the subsidiary's profits and losses.

Question 18

Parent-company-only statements are required by the Securities and Exchange Commission when the restricted net assets of all subsidiaries of a bank holding company exceed 25% of consolidated net assets.

Accepted Answer

The Securities and Exchange Commission (SEC) requires parent-company-only financial statements when the restricted net assets of subsidiaries exceed 25% of the consolidated net assets for bank holding companies. This requirement ensures transparency and provides a clearer view of the parent company's standalone financial health, separate from its subsidiaries.

Question 19

Parent-company-only statements are required by the Securities and Exchange Commission when the restricted net assets of all subsidiaries of a bank holding company exceed 25% of the consolidated retained earnings.

Accepted Answer

The answer of Parent-company-only statements are required by the Securities...

Question 20

_____ Which of the following statements is not an argument in support of the equity method?

Accepted Answer

The answer of _____ Which of the following statements is...

Quiz 2: Wholly Owned Subsidiaries: Postcreation Periods