[cpa1988]

The problem states that Peace used the equity method to account for its investment in Surge. I thought the equity method was when 20% – 50% of an investment in sub was owned. So that confuses me. But if they are using equity method, wouldn’t Peace recognize dividends? Or am I to assume that since the question asks what would be reported in this years ‘consolidated’ statement of RE that they are using acquisition method at YE? I am just confused by the wording in some of these. Material is difficult enough, why word everything so strange?

On January 2 of the current year, Peace Co. paid $310,000 to purchase 75% of the voting shares of Surge Co. Peace reported retained earnings of $80,000, and Surge reported contributed capital of $300,000 and retained earnings of $100,000. The purchase differential was attributed to depreciable assets with a remaining useful life of 10 years. Peace used the equity method in accounting for its investment in Surge. Surge reported net income of $20,000 and paid dividends of $8,000 during the current year. Peace reported income, exclusive of its income from Surge, of $30,000 and paid dividends of $15,000 during the current year. What amount will Peace report as dividends declared and paid in its current year’s consolidated statement of retained earnings?

a. $21,000

b. $15,000

c. $23,000

d. $8,000

Explanation

Choice “b” is correct. When the financial statements of Peace and Surge are consolidated, the equity of Surge, including Surge’s retained earnings, will be eliminated. The consolidated statement of retained earnings will include only the $15,000 dividend paid by Peace during the current year.

[jessanqi]

Hi can anyone advise what's the difference between these two question? why the below question didn't concern the noncontrolling interest??

Thank you!!

On January 2, of the current year, Peace Co. paid $310,000 to purchase 75% of the voting shares of Surge Co. Peace reported retained earnings of $80,000, and Surge reported contributed capital of $300,000 and retained earnings of $100,000. The purchase differential was attributed to depreciable assets with a remaining useful life of 10 years. Peace used the equity method in accounting for its investment in Surge. Surge reported net income of $20,000 and paid dividends of $8,000 during the current year. Peace reported income, exclusive of its income from Surge, of $30,000 and paid dividends of $15,000 during the current year. What amount will Peace report as dividends declared and paid in its current year's consolidated statement of retained earnings?

A. $8,000
B. $15,000
C. $21,000
D. $23,000

Explanation
The correct answer is B. The consolidated statement of retained earnings is the parent’s statement of retained earnings because the stockholder’s equity of the subsidiary is eliminated during the consolidation process. If the consolidated statement of retained earnings is the parent’s, then the beginning retained earnings of the parent, plus the net income of the parent, minus dividends paid by the parent equal the ending retained earnings of the parent, which is the consolidated retained earnings.

Since the consolidated statement of retained earnings is the parent’s (Peace) and the dividends paid is a component of the statement of retained earnings, then the consolidated dividends paid is whatever Peace (parent) paid during the period, which amounts to $15,000.

[Author]

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