When a company applies the initial value method in accounting for its investment in a subsidiary and the subsidiary reports income less than dividends paid, what entry would be made for a consolidation worksheet?
A. Retained earnings
Investment in subsidiary

B. Investment in subsidiary
Retained earnings

C. Investment in subsidiary
Equity in subsidiary's income

D. Investment in subsidiary
Additional paid-in capital

E. Retained earnings
Additional paid-in capital

A)A above
B)B above
C)C above
D)D above
E)E above

Question

When a company applies the initial value method in accounting for its investment in a subsidiary and the subsidiary reports income less than dividends paid, what entry would be made for a consolidation worksheet? 
A. Retained earnings
Investment in subsidiary

B. Investment in subsidiary
Retained earnings

C. Investment in subsidiary
Equity in subsidiary's income

D. Investment in subsidiary
Additional paid-in capital

E. Retained earnings
Additional paid-in capital

A)A above
B)B above
C)C above
D)D above
E)E above

Quizplus · Accepted Answer

When using the initial value method, the investment in the subsidiary is recorded at cost and not adjusted for the subsidiary's income or dividends. If the subsidiary's income is less than the dividends paid, the excess dividends reduce the investment account, so the entry would be to debit Retained Earnings and credit Investment in Subsidiary.

When a Company Applies the Initial Value Method in Accounting