On January 1, 19xl, Bennett Company paid $1,000,000 to acquire all of the outstanding stock of Frazier Company. At that date the balance sheet of Frazier Company showed total assets of $1,500,000, total liabilities of $500,000, common stock of $700,000, and retained earnings of $300,000. During 19xl there were no transactions between Bennett Company and Frazier Company except for a $40,000 dividend paid by Frazier. The final net income reported on Frazier Company's individual income statement for the year ended December 31, 19x1, V'C.S $100,000.
1. Which of the following is true concerning the financial statements prepared as of December 31, 19x1?
A. If the Bennett Company uses the cost method to record its investment in Frazier Company, the balance in the Investment in Frazier Company account on Bennett Company's books will be $1,100,000.
B. If the Bennett Company uses the equity method to record its investment in Frazier Company, the balance in the Investment in Frazier Company account on Bennett Company's books will be $1,060,000.
C. If the Bennett Company uses the cost method, the net income from its investment in Frazier Company for the year on its individual income statement will be $100,000.
D. If the Bennett Company uses the equity method, the net income from its investment in Frazier Company for the year on its individual income statement will be $40,000.
2. When a consolidated balance sheet is prepared from the separate balance sheets on December 31, 19x1, which one of the following sets of elimination entries will be used?
A. If Bennett Company uses the equity method to account for its investment in Frazier Company, 1) debit Investment in Frazier Company, $100,000, and credit Retained Earnings, $100,000; and 2) debit Common Stock, $700,000, and Retained Earnings, $300,000, and credit Investment in Frazier Company, $1,000,000.
B. If Bennett Company uses the cost method to account for its investment in Frazier Company, 1) debit Investment in Frazier Company, $100,000, and credit Retained Earnings, $100,000; and 2) debit Common Stock, $700,000, and Retained Earnings, $300,000, and credit Investment in Frazier Company, $1,000,000.
C. If Bennett Company uses the cost method to account for its investment in Frazier Company, 1) debitlnvestment in Frazier Company, $40,000, and credit Retained Earnings, $40,000; and 2) debit Common Stock, $700,- 000, and Retained Earnings, $260,000, and credit Investment in Frazier Company, $960,000.
D. If Bennett Company uses the equity method to account for its investment in Frazier Company, 1) debit Investment in Frazier Company, $100,000, and credit Retained Earnings, $100,000; and 2) debit Common Stock, $700,000, and Retained Earnings, $360,000, and credit Investment in Frazier Company, $1,060,000.