ACCT 401 Exam 3 test with
100% correct answers
Complete Equity Method
a. Embraces full accrual accounting in maintaining the investment
account and related income over time.
b. Record the initial investment using the fair-value principle.
Why use the complete equity method?
a. Creates a parallel between the parent's investment account and
changes in the underlying equity of the subsidiary.
b. Popular in companies where management periodically measures
each subsidiary's profitability using accrual-based income figures.
Establishing Reciprocity - Complete Equity Method
Not required. Purpose of reciprocity is to convert the cost method to
partial equity.
The parent recognizes the reported income accruing from the
subsidiary:
Debit - Investment in S
Credit - Equity Income
Subsidiary dividends declared reduce the investment balance:
Debit - Cash
Credit - Investment in S
Unrealized Gains on Intra-Equity Transactions
Is deferred and is classified as Other Comprehensive Income.
Allocation of Differences
a. When a company pays a premium to consummate an acquisition,
the allocation of that premium to the accounts in the balance sheet
becomes a crucial issue under acquisition accounting rules.
b. As they mature, the balance sheet accounts will impact the
income statement via depreciation, cost of goods sold, impairment
charges, and so on.
Depreciable Assets
100% correct answers
Complete Equity Method
a. Embraces full accrual accounting in maintaining the investment
account and related income over time.
b. Record the initial investment using the fair-value principle.
Why use the complete equity method?
a. Creates a parallel between the parent's investment account and
changes in the underlying equity of the subsidiary.
b. Popular in companies where management periodically measures
each subsidiary's profitability using accrual-based income figures.
Establishing Reciprocity - Complete Equity Method
Not required. Purpose of reciprocity is to convert the cost method to
partial equity.
The parent recognizes the reported income accruing from the
subsidiary:
Debit - Investment in S
Credit - Equity Income
Subsidiary dividends declared reduce the investment balance:
Debit - Cash
Credit - Investment in S
Unrealized Gains on Intra-Equity Transactions
Is deferred and is classified as Other Comprehensive Income.
Allocation of Differences
a. When a company pays a premium to consummate an acquisition,
the allocation of that premium to the accounts in the balance sheet
becomes a crucial issue under acquisition accounting rules.
b. As they mature, the balance sheet accounts will impact the
income statement via depreciation, cost of goods sold, impairment
charges, and so on.
Depreciable Assets
