Chapter 3

Question 1

When the parent uses the equity method of pre-consolidation investment bookkeeping, the parent records an increase in its Equity Investment account on its balance sheet and an increase in Equity Income in its income statement relating to ____ that it earns.

Answer 1

“Income from Subsidiary”

Question 2

In addition to replacing the Equity Investment account on the balance sheet with the assets and liabilities to which it relates, the post-acquisition consolidation process will now also need to replace the ____ account in the parent’s pre-consolidation income statement with the disaggregated revenues and expenses of the subsidiary to which it relates.

Answer 2

__Income from Subsidiary__

Question 3

As we discuss in Chapter 2, the purchase price paid by the parent represents the ____ of the subsidiary’s business. The difference between the ____ of the subsidiary (i.e., the purchase price) and the net book value of the subsidiary (i.e., the book value of its ____) is the ____.

Answer 3

As we discuss in Chapter 2, the purchase price paid by the parent represents the __fair value__ of the subsidiary’s business. The difference between the __fair value__ of the subsidiary (i.e., the purchase price) and the net book value of the subsidiary (i.e., the book value of its __SE__) is the __AAP__

Question 4

Consolidation entry [C] will reverse out the two changes depicted in the Equity Investment T-account. The first change is the parent company’s recording of Equity Income.
This item will include:

Answer 4

Both the parent’s share of Net Income reported by the subsidiary along with the AAP amortization recorded under the Equity Method.