When a partially owned created subsidiary reports profits, the amount reported for consolidated net income would be the highest under which of the following methods?
A) The parent company concept.
B) The economic unit concept.
C) Proportional consolidation.
D) None of the above.

Question

Quizplus · Accepted Answer

When consolidating financial statements, the way in which a subsidiary's profits are reported can vary depending on the consolidation method used. Here's how each method generally affects the reporting of consolidated net income:
a. The parent company concept: Under this method, the subsidiary's entire net income is included in the consolidated net income, but the portion of the subsidiary's net income that belongs to the non-controlling interest (minority interest) is subtracted out as a separate line item. This means that the consolidated net income reflects only the parent's share of the subsidiary's profits.
b. The economic unit concept: This method consolidates the parent and subsidiary as if they are a single economic entity, regardless of the percentage ownership. The entire net income of the subsidiary is included in the consolidated net income, without subtracting the non-controlling interest. This typically results in the highest consolidated net income figure because it includes 100% of the subsidiary's profits.
c. Proportional consolidation: This method is used when the parent company does not have full control but has significant influence over the subsidiary (often in joint ventures). The parent company includes its proportionate share of the subsidiary's assets, liabilities, revenues, and expenses in its consolidated financial statements. This would not result in the highest consolidated net income compared to the economic unit concept because it only includes the parent's share of the subsidiary's profits, not the entire amount.
d. None of the above: This is not a correct answer because the economic unit concept generally results in the highest consolidated net income when a partially owned subsidiary reports profits.
Therefore, the economic unit concept would typically result in the highest consolidated net income because it includes the total profits of the subsidiary without subtracting the non-controlling interest's share of those profits.

When a Partially Owned Created Subsidiary Reports Profits, the Amount