Parent Company purchased 100% of Son INC. on Jan 1, 20X2 for $420,000. Son repor
ID: 2599045 • Letter: P
Question
Parent Company purchased 100% of Son INC. on Jan 1, 20X2 for $420,000. Son reported earnings of $82,000 and declared dividends of $4,000 during 20X2. Based on the proceeding information and assuming Parent uses the cost method to account for its investment in Son. What is the balance in Parent’s investment in Son account on December 31,20X2, prior to consolidation?
a) 498,000
b) 424,000
c) 420,000
d) 416,000
Based on the preceding information and assuming Parent uses the equity method to account for its investment in Son, what is the balance in Parent’s Investment in Son account on December 31,20X2, prior to consolidation?
a) 498,000
b) 424,000
c) 420,000
d) 416,000
**SHOW WORK PLEASE.
Explanation / Answer
Answer: Option c) $420,000
Under the cost method, the investment will be recorded at the cost at which it was acquired by Parent Company.
Answer: Option a) $498,000
Under the equity method, the investment will be reduced by the Parent’s share in dividends declared by Son Company and increased by its share in the net income of Son Company.
Investment = $420,000 + $82,000 - $4,000 = $498,000
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