Chapter_7_homework - CHAPTER 7 Consolidated Financial...

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CHAPTER 7 Consolidated Financial Statements: subsequent to date of business combination ANSWERS TO REVIEW QUESTIONS 3. In addition to the usual debits and credits to revenue and expense ledger accounts, the closing entries for a parent company that uses the equity method of accounting include a credit to the Retained Earnings of Subsidiary account. The amount of the credit is the difference between the parent company’s share of the subsidiary's adjusted net income for the accounting period and its share of the subsidiary’s dividends for the period. Use of a Retained Earnings of Subsidiary account identifies the portion of the parent company’s retained earnings not available for dividends to the parent’s stockholders. 5. Advantages that result from the use of the equity method, rather than the cost method, of accounting for a subsidiary’s operating results include the following: (1) The equity method emphasizes the economic substance of the parent company–subsidiary relationship, consonant with financial accounting theory. (2) The equity method permits use of parent company journal entries to reflect many items that
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Chapter_7_homework - CHAPTER 7 Consolidated Financial...

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