A Parent Corporation That Uses the Equity Method of Accounting

question 104

Multiple Choice

A parent corporation that uses the equity method of accounting for its investment in a 40 percent owned subsidiary,which earned $20,000 and paid $5,000 in dividends,made the following entries: $\begin{array}{lll}\text {Investment in Associate. }&8,000\\\text { Investment revenue.}&& 8,000\\\text {Cash. }&2,000\\\text {Dividend revenue }&&2,000 \\\end{array}$ What effect will these entries have on the parent's balance sheet?

• A)Overstate investment, overstate retained earnings
• B)Understate investment, understate retained earnings
• C)Overstate investment, understate retained earnings
• D)Financial position will be fairly stated
• E)Understate investment, overstate retained earnings

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