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CHAPTER 4 Note: The letter A or B indicated for a question, exercise, or problem means that the question, exercise, or problem relates to a chapter appendix. ANSWERS TO QUESTIONS 1 Nonconsolidated subsidiaries are expected to be relatively rare. In those situations where a subsidiary is not consolidated, the investment in the subsidiary should be reported in the consolidated statement of financial position at cost, along with other long-term investments. 2. A liquidating dividend is a return of investment rather than a return on investment. Consequently, the amount of a liquidating dividend should be credited to the investment account rather than to dividend income when the cost method is used, whereas regular dividends are recorded as dividend income under the cost method. If the equity method is used, all dividends are credited to the investment account. 3. When the parent company uses the cost method, the workpaper elimination of intercompany dividends is made by a debit to Dividend Income and a credit to Dividends Declared. This elimination prevents the double counting of income since the subsidiary's individual revenue and expense items are combined with the parent company's in the determination of consolidated net income. When the parent company uses the equity method, the workpaper elimination for intercompany dividends is made by a debit to the investment account and a credit to Dividends Declared. 4. When the parent company uses the cost method, dividends received are recorded as dividend income. When the parent company uses the partial equity method, the parent company recognizes equity income on its books equal to its ownership percentage times the investee companys reported net income. When the parent company uses the complete equity method, the parent recognizes income similar to the partial equity method, but adjusts the equity income for additional charges or credits when the purchase price differs from the fair value of the investee companys net assets, and for intercompany profits (addressed in chapters 6 and 7). 5. Consolidated net income consists of the parent company's net income from independent operations plus (minus) any income (loss) earned (incurred) by its subsidiaries during the period, adjusted for any intercompany transactions during the period and for any excess depreciation or amortization implied by a purchase price in excess of book values. Consolidated retained earnings consist of the parent company's retained earnings from its independent operations plus (minus) the parent company's share of the increase (decrease) in its subsidiaries' retained earnings from the date of acquisition. 6. Investment in S Company 356,144 1/1 Retained Earnings, P Company 80% ($461,430 - $16,250)] 356,144 This adjustment recognizes that P Company's share of S Company's undistributed profits from the date of acquisition to the beginning of the current year is properly a part of beginning-of-year 4 - 1 consolidated retained earnings. It also enhances the elimination of the investment account. This consolidated retained earnings.... View Full Document

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