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 consolidated worksheet?

Question

Quizplus · Accepted Answer

When a company applies the initial method of accounting for an investment in a subsidiary, it records the investment at cost and recognizes its share of the subsidiary's net income as dividend income. When the subsidiary reports income in excess of dividends paid, it means that the subsidiary has retained earnings. In the consolidated worksheet, the retained earnings of the subsidiary need to be eliminated. This can be achieved by making an entry to reduce the investment in the subsidiary by the amount of the subsidiary's retained earnings and to recognize the non-controlling interest's share of the subsidiary's net income. The entry would be as follows:
Investment in subsidiary (reduced by subsidiary's retained earnings)      xxx
Retained earnings of subsidiary                                            xxx
Non-controlling interest in subsidiary's net income                      xxx
This entry is reflected in option B.

When a Company Applies the Initial Method in Accounting for Its