Carr Co. owns 100% of the common shares of Ice Tops Ltd. Carr records its investment in Ice Tops using the cost method. Carr and Ice Tops have transactions with each other. In preparing Carr's consolidated financial statements, which of the following should be done?

A) Ice Tops's retained earnings should be deducted from Carr's retained earnings.
B) Ice Tops's share capital should be added to Carr's share capital.
C) Dividends received by Carr from Ice Tops should be deducted from Carr's dividend income.
D) Carr's receivable from Ice Tops should be netted with Carr's accounts receivable.

Question

Jocelyne Magdaleno · Accepted Answer

Final Answer : C, Explanation :  When preparing consolidated financial statements, intercompany transactions, such as dividends received by the parent company from its subsidiary, must be eliminated. This is because these transactions are internal to the economic entity formed by the parent and its subsidiary and do not represent an inflow of resources from external parties. Therefore, dividends received by Carr from Ice Tops should be eliminated from Carr's dividend income to avoid double counting of income within the consolidated entity.

Definitions

Learning Objectives

Learning Objectives

Related questions