Question

. If a parent company uses full equity method in accounting for its subsidiary, consolidated net income would be the same as parent company net income EXCEPT when

a. the parent sold product to the subsidiary at a gross profit, and the subsidiary still had some product in inventory.

b. the parent sold product to the subsidiary at a gross profit, and the subsidiary sold all of the product.

c. any inter-company product sales were made during the year.

        d. the parent company owns less than 100% of the subsidiary.

A 70% owned subsidiary declares and pays a cash dividend. What effect does the dividend have on consolidated retained earnings and the NCI share of owners’ equity?

        a. no effect on either retained earnings or NCI share of O/E

        b. no effect on retained earnings and a decrease in NCI share of O/E by 30% of the dividend

        c. decrease in both retained earnings and NCI share of O/E by 30% of the dividend

        d. decrease in retained earnings by 70% of the dividend, and no effect on NCI share of O/E

Strategic Corporation spent $1,000,000 in research and development costs for a patented technology. The book value recorded for registering the patent was $50,000. Outside appraisers determined the fair market value of the patent to be $2,500,000. Prestige Corporation purchased 80% of the stock of Strategic. At what amount should the patent be shown on the consolidated financial statements?

        a. $2,000,000                             b. $1,500,000                      c. $1,050,000                      d. $2,500,000

Answer 1

1)

d. the parent company owns less than 100% of the subsidiary.

"Because for wholly-owned subsidiary using equity method when accounting for its on its own books the parent's revenues will equal consolidated revenues"

2)b. no effect on retained earnings and a decrease in NCI share of O/E by 30% of the dividend

Why B?

Dividend paid by subsidiary to parent would be eliminated while consolidation.

But 30% of dividend paid to the noncontrolling would reduce noncontrolling interest on the consolidated balance sheet Because, NCI Balance calculation formula:

Beginning noncontrolling interest

+ NCI share of subsidiary net income

- NCI share of subsidiary dividends

Ending noncontrolling interest

3)

d. $2,500,000

Why D?

Patent Should be Value at Fair value considering for impairment at regular interval of time.