Question

Why is the amount of the worksheet adjustment to correct the beginning balance of consolidated Retained Earnings (or the parent's Investment in Subsidiary account when the equity method is employed) reduced from year to year?

(A) Because the parent company is amortizing the gain on the purchase of the debt instruments.
(B) Because the parent company is recognizing the interest income on the debt instruments.
(C) Because the parent company is recognizing the fair value of the debt instruments through net income.
(D) Because the parent company is recognizing the book value of the debt instruments through net income.

Answer 1

The worksheet adjustment decreases annually due to the amortization, depreciation, or impairment of the excess purchase price components over time, impacting consolidated Retained Earnings or the Investment in Subsidiary account.

Step-by-step explanation:

The amount of the worksheet adjustment to correct the beginning balance of consolidated Retained Earnings or the parent's Investment in Subsidiary account when the equity method is employed is reduced from year to year because the excess of the purchase price over the book value of the subsidiary's net assets is allocated to specific accounts and then amortized or depreciated over time. This process involves recognizing amortization, depreciation, and impairment related to these adjustments, hence reducing the overall adjustment needed in subsequent years.