Waite Co. is a wholly-earned subsidiary of Star Ltd. During the year, Waite earned net income of $65,000. Star recorded this income on its books using the equity method. What elimination entry does Star have to make in the consolidation process with respect to this income?
A) $$\begin{array} { | c | c | }
\hline \text { DR Equity earnings in Waite } & 65,000 \
\hline \text { CR Retained earnings } & 65,000 \
\hline
\end{array}$$
B) $$\begin{array} { | c | c | }
\hline \text { DR Equity earnings in Waite } & 65,000 \
\hline \text { CR Investment in Waite } & 65,000 \
\hline
\end{array}$$
C) $$\begin{array} { | l | c | }
\hline \text { DR Investment in Waite } & 65,000 \
\hline \text { CR Equity earnings in Waite } & 65,000 \
\hline
\end{array}$$
D)No entry is required under the equity method.

Question

Waite Co. is a wholly-earned subsidiary of Star Ltd. During the year, Waite earned net income of $65,000. Star recorded this income on its books using the equity method. What elimination entry does Star have to make in the consolidation process with respect to this income?
A) $$\begin{array} { | c | c | } 
\hline \text { DR Equity earnings in Waite } & 65,000 \
\hline \text { CR Retained earnings } & 65,000 \
\hline
\end{array}$$
B) $$\begin{array} { | c | c | } 
\hline \text { DR Equity earnings in Waite } & 65,000 \
\hline \text { CR Investment in Waite } & 65,000 \
\hline
\end{array}$$
C) $$\begin{array} { | l | c | } 
\hline \text { DR Investment in Waite } & 65,000 \
\hline \text { CR Equity earnings in Waite } & 65,000 \
\hline
\end{array}$$
D)No entry is required under the equity method.

Quizplus · Accepted Answer

Under the equity method, the investor records its share of the subsidiary's net income. In the consolidation process, the parent company needs to eliminate any intercompany transactions or balances to avoid double-counting. Since Waite is a wholly-owned subsidiary, all of its net income belongs to Star, and so no portion of it needs to be eliminated. Therefore, the answer is C, which states that no elimination entry is required.

Waite Co Is a Wholly-Earned Subsidiary of Star Ltd B)