Reference no: EM132690927

Problem 1: What is the effect on consolidated net income when a parent company accounts for its investment in a subsidiary by the cost method, rather than by the equity method?

a. If the subsidiary reports a loss, the parent company's investment account will be reduced, but consolidated net income will be higher.
b. If the subsidiary reports a loss, income of the consolidated entity will be lower under the equity method.
c. There will be no difference.
d. If dividends are received by the parent from the subsidiary, the cost method will result in higher consolidated income.