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

When using the initial value method, the investment account in the parent's books remains at the initial cost and no adjustments are made for the subsidiary's earnings. Therefore, in the consolidation worksheet, the parent's investment account in the subsidiary will remain at the initial cost and will not be adjusted for any excess of earnings over dividends paid. The only entry required in the consolidation worksheet is to eliminate the dividends paid by the subsidiary to the parent, which is recorded as a reduction in the investment account in the subsidiary and an increase in the dividends received account. Option B shows the correct entry for this scenario.

When a Company Applies the Initial Value Method in Accounting