A parent company paid $500,000 for a 100% interest in a subsidiary. At the end o
ID: 2489744 • Letter: A
Question
A parent company paid $500,000 for a 100% interest in a subsidiary. At the end ofthe rst year, the subsidiary reported net income of $40,000 and paid $5,000 in divi-dends. The price paid reected understated equipment of $70,000, which will beamortized over 10 years. What would be the subsidiary income reported on the par-ent’s unconsolidated income statement, and what would the parent’s investmentbalance beat the end ofthe rst year under each ofthese methods?
a. The simple equity method
b. The sophisticated equity method
c. The cost method
Explanation / Answer
Solution.
A.Subsidiary income reported on the par-ent’s unconsolidated income statement,
End of first year net income = $40,000
Understated equipment can not be include in profit.
B. Parent’s investment balance be at the end of the rst year under each ofthese method as follows.
a. The simple equity method :-
= 500,000 + 40,000 - 5,000 = $535,000
b. The sophisticated equity method :-
c. The cost method :-
No any change in Investment amount / balance . only increse income by dividend earned.
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