Book: Advanced Accounting Chapter 3

Joe Ben Hoyle

3) When a parent company uses the equity method to account for an investment in a subsidiary, why do both the parents Net Income and Retained Earnings account balances agree with the consolidated totals?

4) When a parent company uses the equity method to account for investment in a subsidiary, the amortization expense entry recorded during the year is eliminated on a consolidation worksheet as a component of Entry I. What is the necessity of removing this amortization?

5) When a parent company applies the initial value method or the partial equity method to an investment, a worksheet adjustment must be made to the parents beginning Retained Earnings account (Entry *C) in every period after the year of acquisition. What is the necessity for this entry? Why is no similar entry found when the parent utilizes the equity method?

6) Several years ago, Jenkins Company acquired a controlling interest in Lambert Company. Lambert recently borrowed $100,000 from Jenkins. In consolidating the financial records of these two companies, how will this debt be handled?