When a company applies the initial 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?
A) A above
B) B above
C) C above
D) D above
E) E above

Question

When a company applies the initial 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? 
A) A above 
B) B above 
C) C above 
D) D above 
E) E above

Quizplus · Accepted Answer

When the initial method is used, the parent company records only the dividends received from the subsidiary as income. Therefore, if the subsidiary reports income in excess of dividends paid, it means there is unrealized income. The unrealized income needs to be recognized in the consolidated financial statements by making an adjusting entry, which is represented in option B. Option A represents the elimination of dividends paid by the subsidiary to the parent, which is a standard consolidation entry. Option C represents the consolidation entry for an acquisition or purchase method, which is not relevant in this case. Option D is a transaction between the parent and the subsidiary, which is not relevant in the context of consolidating financial statements. Option E represents the elimination of intercompany dividends paid, which is a standard consolidation entry.

When a Company Applies the Initial Method in Accounting for Its