A Parent Company Uses the Equity Method to Account for Its

question 42

Multiple Choice

A parent company uses the equity method to account for its wholly-owned subsidiary,but has applied it incorrectly.In each of the past four full years,the company adjusted the Investment account when it received dividends from the subsidiary but did not adjust the account for any of the subsidiary's profits.The subsidiary had four years of profits and paid yearly dividends in amounts that were less than reported net incomes.Which one of the following statements is correct if the parent company discovered its mistake at the end of the fourth year,and is now preparing consolidation working papers?

• A)The parent company's Retained Earnings will be increased by the cumulative total of four years of subsidiary profits.
• B)The parent company's Retained Earnings will be increased by the cumulative total of the first three years of subsidiary profit,and the Subsidiary Income account will be increased by the profit for the current year.
• C)The parent company's Subsidiary Income account will be increased by the cumulative total of four years of subsidiary profits.
• D)A prior period adjustment must be recorded for the cumulative effect of four years of accounting errors.

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Definitions:

Price Decrease

A reduction in the monetary value that must be paid for a product or service.

Resource Demand Curve

A graphical representation showing the relationship between the price of a resource and the quantity of that resource that firms are willing to employ, holding all other factors constant.

Competitive Market

A market structure characterized by many buyers and sellers where no single entity has the power to significantly affect the prices of goods and services.

Product Demand Elasticity

A measure of how sensitive the quantity demanded of a product is to changes in its price.