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

Quizplus · Accepted Answer

All of the options listed are limitations of the assumption of dollar-for-dollar equivalence. Dividends may be restricted by law or loan covenants, risks due to political and economic factors may affect the amount of earnings received by the parent, tax liabilities may arise when remitting earnings from a subsidiary to a parent, and minority interests can limit the parent's discretion over the subsidiary's earnings.

Both Consolidation and Equity Method Accounting Assume a Dollar Earned