If the parent company used the equity method to account for its investment and the subsidiary company showed a profit for the past year, the consolidation elimination entry required to remove a subsidiary's income from the parent's books prior to the preparation of consolidated financial statements would be:
A)
$\begin{array}{|l|r|r|}
\hline& \text { Debit } & \text { Credit } \
\hline \text { Equity method income-Parent } & \$ \$ \$ & \
\hline \text { Retained Earnings - Parent } & & \$ \$ \$\\hline
\end{array}$
B)
$$\begin{array} { | l | r | r | }
\hline & \text { Debit } & \text { Credit } \
\hline \text { Equity method income-Parent } &\$ \$\$ \
\hline \text { Investrnent in Subsidiary } & &\$ \$\$ \
\hline
\end{array}$$
C)
$$\begin{array} { | l | r | r | }
\hline & \text { Debit } & \text { Credit } \
\hline \text { Equity method income-Parent } &\$\$\$ \
\hline \text { Acquisition Differential } & &\$\$\$ \
\hline
\end{array}$$

Question

If the parent company used the equity method to account for its investment and the subsidiary company showed a profit for the past year, the consolidation elimination entry required to remove a subsidiary's income from the parent's books prior to the preparation of consolidated financial statements would be:
A)
 $\begin{array}{|l|r|r|} 
\hline& \text { Debit } & \text { Credit } \
\hline \text { Equity method income-Parent } & \$ \$ \$ & \
\hline \text { Retained Earnings - Parent } & & \$ \$ \$\\hline
\end{array}$ 
B)
 $$\begin{array} { | l | r | r | } 
\hline & \text { Debit } & \text { Credit } \
\hline \text { Equity method income-Parent } &\$ \$\$  \
\hline \text { Investrnent in Subsidiary } & &\$ \$\$  \
\hline
\end{array}$$ 
C)
 $$\begin{array} { | l | r | r | } 
\hline & \text { Debit } & \text { Credit } \
\hline \text { Equity method income-Parent } &\$\$\$ \
\hline \text { Acquisition Differential } & &\$\$\$ \
\hline
\end{array}$$

Quizplus · Accepted Answer

When a parent company uses the equity method to account for its investment in a subsidiary, it recognizes its share of the subsidiary's income by increasing the "Investment in Subsidiary" account on its balance sheet and recording "Equity Method Income" on its income statement. When preparing consolidated financial statements, the parent company must eliminate this income to avoid double-counting the subsidiary's profits that are already included in the consolidated income.
The elimination entry required to remove the subsidiary's income from the parent's books prior to the preparation of consolidated financial statements would be:
B.
$$
\begin{array}{|l|r|r|}
\hline
& \text{Debit} & \text{Credit} \
\hline
\text{Equity method income-Parent} & \text{Profit amount} & \
\hline
\text{Investment in Subsidiary} & & \text{Profit amount} \
\hline
\end{array}
$$
This entry debits the "Equity Method Income-Parent" account, which reduces the income on the parent's income statement, and credits the "Investment in Subsidiary" account, which reduces the investment on the parent's balance sheet. The amount for both the debit and the credit would be the parent's share of the subsidiary's profit for the year.
The other options (A and C) are incorrect because they do not properly reflect the elimination of the equity method income against the investment account. Option D is not a complete option.

If the Parent Company Used the Equity Method to Account