The consolidation elimination entry required to remove any dividends received from a subsidiary prior to the preparation of consolidated financial statements (assuming that the parent uses the cost method to record its investment in the subsidiary) 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)
$$\begin{array} { | l | r | r | }
\hline & \text { Debit } & \text { Credit } \
\hline \text { Dividend Income-Subsidiary } &\$\$\$ & \
\hline \text { Investrnent in Subsidiary } & &\$\$\$ \
\hline
\end{array}$$
C)
$$\begin{array} { | l | r | r | }
\hline & \text { Debit } & \text { Credit } \
\hline \text { Dividend Income-Parent } &\$\$\$& \
\hline \text { Dividends-Subsidiary } & &\$\$\$ \
\hline
\end{array}$$

Question

The consolidation elimination entry required to remove any dividends received from a subsidiary prior to the preparation of consolidated financial statements (assuming that the parent uses the cost method to record its investment in the subsidiary) 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)
 $$\begin{array} { | l | r | r | } 
\hline & \text { Debit } & \text { Credit } \
\hline \text { Dividend Income-Subsidiary } &\$\$\$ & \
\hline \text { Investrnent in Subsidiary } & &\$\$\$ \
\hline
\end{array}$$ 
C)
 $$\begin{array} { | l | r | r | } 
\hline & \text { Debit } & \text { Credit } \
\hline \text { Dividend Income-Parent } &\$\$\$&  \
\hline \text { Dividends-Subsidiary } & &\$\$\$ \
\hline
\end{array}$$

Quizplus · Accepted Answer

When preparing consolidated financial statements, intercompany transactions, including dividends paid by a subsidiary to its parent company, must be eliminated. This is because consolidated financial statements present the financial position and results of operations as if the parent and its subsidiaries are a single economic entity. Dividends paid by a subsidiary to its parent are essentially transfers of money within the economic entity and do not represent income to the entity as a whole.
Assuming that the parent company uses the cost method to record its investment in the subsidiary, the parent would record dividends received as dividend income. To eliminate this intercompany dividend for consolidation purposes, the following entry would be made:
Debit: Dividend Income-Parent (for the amount of the dividend received)
Credit: Dividends-Subsidiary (for the amount of the dividend declared)
This entry removes the dividend income recognized by the parent and the corresponding dividend declared by the subsidiary, ensuring that the consolidated financial statements do not show this internal transfer as income.
Therefore, the full answer for the input question is:
C.
$$
\begin{array}{|l|r|r|}
\hline
& \text{Debit} & \text{Credit} \
\hline
\text{Dividend Income-Parent} & \$\$\$ & \
\hline
\text{Dividends-Subsidiary} & & \$\$\$ \
\hline
\end{array}
$$

The Consolidation Elimination Entry Required to Remove Any Dividends Received