Question

When consolidating a subsidiary under the equity method, which of the following statements is true with regard to the subsidiary subsequent to the year of acquisition?

A) all net assets are revalued to fair value and must be amortized over their useful lives
B) only net assets that had excess fair value over book value when acquired by the parent must be amortized over their useful lives
C) all depreciable net assets are revalued to fair value at date of acquisition and must be amortized over their useful lives
D) only depreciable net assets that have excess fair value over book value must be amortized over their useful lives
E) only assets that have excess fair value over book value must be amortized over their useful lives

Answer 1

When consolidating a subsidiary under the equity method, only depreciable net assets that have excess fair value over book value must be amortized over their useful lives.

Step-by-step explanation:

When consolidating a subsidiary under the equity method, the correct statement is D) only depreciable net assets that have excess fair value over book value must be amortized over their useful lives.

Under the equity method of accounting, the parent company recognizes its share of the subsidiary's net income as a single-line item on its own income statement. The subsidiary's assets and liabilities are not revalued to fair value, except in the case of depreciable net assets that have excess fair value over book value. These assets are amortized over their useful lives.