Rally Ltd Owns 70% of Neily Ltd

question 39

Multiple Choice

Rally Ltd. owns 70% of Neily Ltd. and records it using the cost method. Neily did not have any transactions with Rally with the exception of the payment of dividends. On its separate-entity financial statements, Rally plans to report its investment in Neily using the equity method. To this end, Rally has prepared a worksheet with adjustments to eliminate the dividends and recognize its share of Neily's current income. To recognize Rally's share of Neily's unremitted income in prior years, the following adjustments should be made:

• A)Debit the Investment in Neily account and credit the Retained Earnings account.
• B)Debit the Retained Earnings account and credit the Investment in Neily account.
• C)Debit the Investment in Neily account and credit the Equity in Earnings of Neily account.
• D)No entry is required at this time.

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Definitions:

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Disequilibrium

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