Final answer:
The correct entry for a consolidation worksheet when a company applies the initial value method in accounting for its investment in a subsidiary and the subsidiary reports income less than dividends paid is option C) Investment in subsidiary Equity in subsidiary's income.
Step-by-step explanation:
Utilizing the initial value method in accounting for an investment in a subsidiary involves recognizing the investment at its original cost. When the subsidiary reports income less than dividends paid, a nuanced entry is required in the consolidation worksheet to accurately reflect this scenario. The correct entry, in this case, aligns with Option C) "Investment in subsidiary Equity in subsidiary's income."
The rationale behind this entry lies in the foundational principles of the initial value method. This method considers the investment in the subsidiary as initially valued at its original cost, disregarding subsequent fluctuations in market value. The income generated by the subsidiary, reduced by dividends paid, directly influences the equity of the subsidiary.
By making an entry that debits "Investment in subsidiary" and credits "Equity in subsidiary's income," the consolidation worksheet effectively captures the impact of the subsidiary's performance on the parent company's financials. This entry acknowledges the income attributable to the parent through its investment in the subsidiary, providing a comprehensive and accurate representation of the financial relationship between the two entities under the initial value method.