If A Company acquires 80 percent of the stock of B Company on January 1, 20X2, immediately after the acquisition, which of the following is correct?

 If A Company acquires 80 percent of the stock of B Company on January 1, 20X2, immediately after the acquisition, which of the following is correct?

Multiple Choice

Consolidated retained earnings will be equal to the combined retained earnings of the two companies.


Goodwill will always be reported in the consolidated balance sheet.


A Company’s additional paid-in capital may be reduced to permit the carryforward of B Company retained earnings.


Consolidated retained earnings and A Company retained earnings will be the same.

Answer 

Consolidated retained earnings and A Company retained earnings will be the same.

Explanation
 

Under the equity method, consolidated retained earnings will always equal the retained earning balance of the acquiring company (A company) at the date of acquisition regardless of the percentage owned. The retained earnings balance of the acquired company (B Company) is eliminated in consolidation. This will continue to be true if the parent uses the fully-adjusted equity method to account for its investment.

(Consolidated retained earnings will be equal to the combined retained earnings of the two companies.) Incorrect. The retained earnings of B Company is eliminated during consolidation.
(Goodwill will always be reported in the consolidated balance sheet.) Incorrect. Goodwill does not arise in every consolidation. If goodwill were to arise in this acquisition, it would appear on the consolidated balance sheet. However, there is insufficient data to determine the existence of goodwill.
(A Company’s additional paid-in capital may be reduced to permit the carryforward of B Company retained earnings.) Incorrect. B Company’s retained earnings are never carried forward, rather they are eliminated during consolidation.