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?
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?
$109,800
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?
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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.
