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Questions and Answers
The entry to convert from the initial value method to the equity method usually involves a debit to Investment in Subsidiary account and a credit to what account?
The entry to convert from the initial value method to the equity method usually involves a debit to Investment in Subsidiary account and a credit to what account?
What should be the Investment in Shaw Company account balance in the records of Parkway Corporation at December 31 of the third year?
What should be the Investment in Shaw Company account balance in the records of Parkway Corporation at December 31 of the third year?
B
What is consolidated net income for the third year of operations if the parent company uses the partial equity method?
What is consolidated net income for the third year of operations if the parent company uses the partial equity method?
$109,800
What is consolidated net income for the third year of operations if the parent company uses the initial value method?
What is consolidated net income for the third year of operations if the parent company uses the initial value method?
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What is consolidated retained earnings at January 1 of the third year if the parent company uses the equity method?
What is consolidated retained earnings at January 1 of the third year if the parent company uses the equity method?
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Which of the following circumstances would require a write-down of goodwill? (Select all that apply)
Which of the following circumstances would require a write-down of goodwill? (Select all that apply)
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Study Notes
Entry Conversion from Initial Value to Equity Method
- Conversion to the equity method requires a debit to Investment in Subsidiary account.
- Credit goes to Parent's beginning of the year Retained Earnings.
Parkway Corporation Acquisition of Shaw Company
- Parkway Corporation purchased Shaw Company for $220,000 cash two years ago.
- Shaw's net assets had a book value of $148,000 at acquisition.
- Equipment was undervalued by $20,000 and has an 8-year useful life.
- Shaw's database valued at $52,000 will be amortized over ten years.
- Shaw reported net income of $25,000 in the acquisition year and $32,500 in the following year.
- Dividends of $2,500 were declared and paid in both years.
Investment in Shaw Company Account Balance
- Investment in Shaw Company account balance determined for Parkway at December 31 of the third year is represented by option B.
Consolidated Net Income Calculation (Partial Equity Method)
- If using the partial equity method, consolidated net income for the third year is calculated to be $109,800.
Consolidated Net Income Calculation (Initial Value Method)
- If using the initial value method, consolidated net income remains consistent at $109,800 for the third year.
Consolidated Retained Earnings Calculation
- Consolidated retained earnings at January 1 of the third year using the equity method is established at $150,000.
Goodwill Write-Down Requirements
- Goodwill write-down is required in cases of:
- Permanent impairment of value associated with goodwill.
- A decline in the fair value of the related subsidiary or reporting unit.
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Description
Test your knowledge on the equity method and initial value method in accounting with these flashcards based on Chapter 3. Each card presents a question that requires understanding of retained earnings and investment accounts in a parent-subsidiary relationship.
