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?
A) Retained earnings
Investment in subsidiary
B) Investment in subsidiary
Retained earnings
C) Investment in subsidiary
Equity in subsidiary's income
D) Equity in subsidiary's income
Investment in subsidiary
E) Addditional paid-in capital
Retained eargings

Question

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?
A) Retained earnings
Investment in subsidiary
B) Investment in subsidiary 
Retained earnings
C) Investment in subsidiary 
Equity in subsidiary's income
D) Equity in subsidiary's income
 Investment in subsidiary
E) Addditional paid-in capital
 Retained eargings

Quizplus · Accepted Answer

When using the initial value method, the parent company records its investment in the subsidiary at cost and then makes adjustments for its share of the subsidiary's income or losses. If the subsidiary reports income in excess of dividends paid, it means that the parent company needs to increase its investment in the subsidiary to reflect the additional income earned.

The entry that would be made for a consolidation worksheet in the second year would be to increase the investment in the subsidiary by the parent company's share of the excess income, which would increase the parent company's share of the subsidiary's equity. Therefore, the correct answer is B.

When a Company Applies the Initial Value Method in Accounting