When a company applies the initial value method in accounting for its investment in a subsidiary, and the subsidiary reports income in excess of dividends paid, what entry would be made for a consolidation worksheet for the second year?

Question

Quizplus · Accepted Answer

In the second year, the excess income of the subsidiary will increase the balance of its retained earnings. Under the initial value method, the parent company's investment in the subsidiary remains at its initial value, and does not reflect any changes in the subsidiary's equity. Therefore, to adjust for the increase in the subsidiary's retained earnings, a worksheet elimination entry is needed to reduce the subsidiary’s equity by the amount of the excess income, and increase the non-controlling interest share of the subsidiary's equity. The entry to be made is:
Debit: Investment in Subsidiary
Credit: Non-controlling Interest in Subsidiary
Credit: Excess Income of Subsidiary

When a Company Applies the Initial Value Method in Accounting